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The price of a stock today is $800. One year from today, the price is expected...

The price of a stock today is $800. One year from today, the price is expected to be $840 and the stock is expected to pay a dividend of $16 per share. The risk-free rate is 0.06, the expected return on the market is 0.16, and the beta of the stock is 0.6. Calculate the stock's alpha. Express your answer with two digits after the decimal point (e.g., 0.12 or -0.12).

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Answer #1

Aplha = Actual Return - CAPM

Acutal Return = 840 - 800 + 16 800

= 7%

CAPM = R: + beta(Rm - R)

= 0.06 +0.6{0.16 -0.06)

= 12%

Alpha = 7% - 12% = 5% OR 0.05

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