Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%?

A) .0%
B) 1%
C) 2%
D) 3%

Index Model

A statistical model to represent the returns of a security or a portfolio as a function of the returns of the market as a whole, along with random error.

Market Return

The overall return generated by the stock market or a specific segment of the market, over a given period.

Residual

The amount remaining after the major part or parts have been accounted for; in finance, often refers to the remainder left after specific calculations, such as dividends from a corporation after major expenses are paid.