Q:
A:
Stocks with a positive alpha are considered
to be underpriced, while those with a negative alpha
are thought to be overpriced. If you are analyzing
the alpha of a stock, you are most likely concerned
with the:
a) Riskadjusted return
b) Sharpe ratio
c) Pricetoearnings ratio
d) Internal rate of return
a) Riskadjusted return
b) Sharpe ratio
c) Pricetoearnings ratio
d) Internal rate of return
The correct answer is a):
The riskadjusted return attempts to measure the risks taken to achieve a desired return. Alpha refers to the excess return over the expected return for the level of risk implied by the security’s beta. Riskadjusted return is usually measured by assigning the security an alpha rating. The sharpe ratio uses standard deviation as a performance measure.
The riskadjusted return attempts to measure the risks taken to achieve a desired return. Alpha refers to the excess return over the expected return for the level of risk implied by the security’s beta. Riskadjusted return is usually measured by assigning the security an alpha rating. The sharpe ratio uses standard deviation as a performance measure.
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