Davita Spencer is a manager at El Cap Asset Management. She can generate an alpha of 2%

a year up to $100 million. After that her skills are spread too thin, so cannot add value and her alpha is zero. El Cap charges a fee of 1% per year on the total amount of money under management

(at the beginning of each year). Assume that there are always investors looking for positive alpha and no investor would invest in a fund with a negative alpha. In equilibrium, that is, when no investor either takes out money or wishes to invest new money,

a. What alpha do investors in Davita’s fund expect to receive?

b. How much money will Davita have under management?

c. How much money will El Cap generate in fee income?

Appendix