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 the 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).

Question

Business

Brenda Ochoa

11 April, 12:16

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 the 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).

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Leila Trevino · Answer 1

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.