Question

Which one of the following stocks must have the highest alpha?

Select one:

a. E(R)=6%, beta =1

b. E(R) = 4%, beta =1

c. E(R)=4%, beta = 0.5

d. E(R)=6%, beta = 0.5

Answer 1

Alpha = E(R) - CAPM

Alpha is higher when E(R) is higher and CAPM is lower. CAPm is lower when beta is low because higher the beta, higher the CAPM. So E(R) is higher @ 6% and Beta is Lower @ 0.5 Which is given by Option D. So Option D is correct.

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