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12. A mutual fund has earned an annual average return of 15% over the last 5...

12. A mutual fund has earned an annual average return of 15% over the last 5 years. During that time, the average risk-free rate was 2% and the average market return was 12% per year. The correlation coefficient between the mutual fund’s and market’s returns was 0.7. The standard deviation of returns was 30% for the mutual fund and 22% for the market. What was the fund’s CAPM alpha?

Stuck on this. Any help would be greatly appreciated.

Solutions

Expert Solution

Firstly, we need to calculated the Beta of mutual fund. We can use following equation to compute Beta:

where,

MF = Mutual Fund

M = Market

Beta

= correlation

= standard deviation

putting the values:

Now, Calculate the Expected return of Mutual Fund under CAPM:

where,

E(Rmf) = Expected return of mutual fund

Rf = Risk free rate

Rm = Market return

CAPM Alpha is excess return of stock over expected return of stock.

jeff jeffy answered 1 year ago

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