You believe the stock of IBM to be underpriced. In order to verify this belief...
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You believe the stock of IBM to be underpriced. In order to verify this belief and to get an impression of the extent of underpricing, you want to compute the stocks alpha. The risk-free rate is 4%, the market portfolio has an expected return of 10%, and a standard deviation of 10%. IBM has an expected return of 15% and covariance with the market of .015.
What is the alpha of IBM?
a) -3%
b) 0%
c) 2%
d) 4%
e) None of the above.
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