Investment A:

CAPM Alpha = 0.27

3 Factor model alpha = 0.03

Which of the following is correct?

a) Since it has a tilt towards small stocks and value stocks, the 3-Factor Model will reduce the benchmark for this investment relative to the CAPM, thus lowering its alpha in the 3-Factor model

b) Since it has a tilt towards small stocks and value stocks, the 3-Factor Model will increase the benchmark for this investment relative to the CAPM, thus lowering its alpha in the 3-Factor model