Explanation:
Jensen alphas or alpha of the stock = Actual return of stock − CAPM
Alpha = A(R) − [R_f + [E(R_m) − R_f]β_p]
= 0.145 − [0.06 + [0.13 − 0.06]1.1]
= 0.008 or 0.8%
Since UUA has a positive alpha of 0.8%, it suggests that the stock has outperformed the market by 0.8%.
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Q.220 Ross Linn is analyzing the performance of different stocks of a portfolio using the alpha measure of performance. Linn has compiled the following data regarding UUA:
Covariance = 0.027
Variance of the stock = 12%
Risk-free rate of return = 6%
Expected market return = 13%
Actual stock's return = 14.5%
Beta = 1.1
Determine the correct alpha of UUA's stock and its appropriate interpretation.
A
The alpha of UUA is 0.8% and the stock has underperformed the market.
B
The alpha of UUA is 0.8% and the stock has outperformed the market.
C
The alpha of UUA is -4.625% and the stock has underperformed the market.
D
The alpha of UUA is -4.625% and the stock has outperformed the market.
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