Security a Has an Expected Rate of Return of 12

question 45

Multiple Choice

Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the share is ________.

• A)-1.7%
• B)3.7%
• C)5.5%
• D)8.7%

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Definitions:

Present Value

The immediate value of an upcoming lump sum or series of financial inflows, quantified by a specific rate of return.

Compound Interest

The addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest, making the sum grow at a faster rate than simple interest.

Earnings Rate

The rate at which a company or investment is generating income, typically expressed as a percentage of the investment or capital employed.

Inflation

A period when prices in general are rising and the purchasing power of money is declining.