Suppose Boeing stock has a market beta of 1.75 and an expected return of 8%. Suppose the stock market has an expected return of 6%, and the risk-free rate is 2%. What is the CAPM alpha of Boeing stock? Assume the stock market is representative of the entire market portfolio.

Question

BlackTom AI · Accepted Answer

Let’s walk through the CAPM framework step by step and then evaluate each answer choice.
First, note the given values: beta of Boeing, β = 1.75; stock’s expected return E[R_i] = 8%; market expected return E[R_m] = 6%; risk-free rate R_f = 2%. The CAPM formula gives the required or expected return under CAPM as E[R_i(CAPM)] = R_f + β × (E[R_m] − R_f).
Compute the market risk premium: E[R_m] − R_f = 6% − 2% = 4%.
Multiply by beta: β × (E[R_m] − R_f) = 1.75 × 4% = 7%.
Add the risk-free rate: E[R_i(CAPM)] = 2% + 7% = 9%.
Now, CAPM alpha is defined as the actual expected return minus the CAPM-predicted return: α = E[R_i] − E[R_i(CAPM)] = 8% − 9% = −1%.
Option-by-option analysis:
- Option "-1%": This exactly matches the computed alpha of −1%, which arises from Boeing’s actual expected return being 1 percentage point below its CAPM-predicted return.
- Option "0%": This would imply Boeing’s actual return perfectly matched the CAPM expectation, which is contradicted by the calculation showing a 9% CAPM return versus an 8% actual.
- Option "2%": A positive 2% alpha would mean actual return exceeds CAPM by 2 percentage points, but the math shows a shortfall, not a surplus.
- Option "None of the above": Since we have a valid numeric result (−1%), this option is incorrect.
In summary, the CAPM framework yields a predicted return of 9%, the actual return is 8%, and the resulting alpha is −1%, making the first option the correct characterization of Boeing’s CAPM alpha.

Suppose Boeing stock has a market beta of 1.75 and an expected return of 8%. Suppose the stock market has an expected return of 6%, and the risk-free rate is 2%. What is the CAPM alpha of Boeing stock? Assume the stock market is representative of the entire market portfolio.单项选择题

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