Question

The abnormal return over and above what the security is expected to earn in relation to the market return is known as

Select one:

a. beta

b. alpha

c. error

d. excess return

Answer 1

Answer : b : Alpha (Thumbs up please)

Alpha = expected return - required rate of return = expected return - (Rf +beta(Rm-Rf)

When a firm has some unique/ specific features which makes it superior than market, it generates an extra return, which is called Alpha.

Beta is used in calculating required return so it is not the answer.

Excess return is what market offers in comparison to risk free asset.

Error is when there is a difference in returns due to some factors which can not be identified.

so correct answer is "Alpha"