The market is expected to generate a 12% return and the risk free rate is 4%....

The market is expected to generate a 12% return and the risk free rate is 4%. A portfolio manager has 70% of her capital allocated to stock A with a beta of 0.8, which generated a total return of 11%. 30% of her capital is allocated to stock B with a beta of 1.1, which generated a total return of 12%. What Alpha was generated by the manager by allocating more capital to stock A?

Multiple Choice

0.25%

0.38%

0.18%

0.11%

Solutions

Expert Solution

Question summary : Calculation of Alpha of a protfolio

Answer : Option 3 = 0.18%

Formula is

Alpha = r – R_f – beta * (R_m – R_f )

where r = return on protfolio = weighted average return of A and B = (0.70 * .11) + (0.30 * 0.12) = 11.3%

Rf = risk free rate =4%

Beta of the protfolio is weighted average Beta of A and B = (0.70 * .8) + (0.30 * 1.1) = 0.89

Rm = market return = 12%

Alpha = 0.113 - 0.04 - 0.89( 0.12-0.04)

= 0.113 - 0.04 - 0.0712

= 0.0018

= 0.18%

jeff jeffy answered 2 years ago

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