You are evaluating a fund that had an annual average return of 7.2%. During that time, the average risk-free rate was 1.5% and t

Question

3 years ago

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You are evaluating a fund that had an annual average return of 7.2%. During that time, the average risk-free rate was 1.5% and t

he average market return was 8%. If the fund's beta is 0.8, what was its alpha? Answer in percent, rounded to one decimal place (e.g. 4.32% = 4.3).

Business

1 answer:

PilotLPTM [1.2K] · Answer 1 · 2021-12-10T21:23:21+03:00

Answer:

Risk free rate(Rf) = 1.5%

Market return(Rm) = 8%

Beta(β) = 0.8

ER(P) = Rf + β(Rm – Rf)

ER(P) = 1.5 + 0.8(8-1.5)

ER(P) = 1.5 + 0.8(6.5)

ER(P) = 1.5 + 5.2

ER(P) = 6.7%

Alpha = Annual average return - ER(P)

= 7.2% - 6.7%

= 0.5%

Explanation:

In this case, we will calculate the expected return on the stock based on CAPM. Thereafter, we will calculate alpha by deducting the expected return from annual average return.