Suppose that there is a value trading strategy that earns a positive alpha relative to the CAPM, and can be implemented using a cheap ETF.

You conduct a performance analysis of a hedge fund by including this trading strategy as a second factor in a multi-factor model (so that you will have both the market's excess return and the value factor included in the regression). You find the hedge fund's beta on the value strategy is positive and statistically significant.

What of the following is true?

Group of answer choices

The two-factor alpha is still likely to be the same as the CAPM alpha

The two-factor alpha will be lower than the CAPM alpha.

None of the other answers is correct

The two-factor alpha will be higher than the CAPM alpha.