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Finance question, find alpha???????????
Assume that the CAPM is a good description of stock price returns. The market expected return is 7% with 10% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers but it does change the expected return of the following stocks: Green leaf: Expected return: 12% Volatility: 20% Beta: 1.5 How to find alpha. Thanks
Green leaf expected return = 3% + 1.5*(7% - 3%) = 9% New Expected return = 12%. alpha = 12% - 9% = 3% Note that CAPM does not directly use volatilities.
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