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Suppose that you find a test asset with significantly negative alpha relative to the CAPM. Relative to the Sharpe ratio of the market portfolio,

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Suppose that you find a test asset with significantly negative alpha relative to the CAPM. Relative to the Sharpe ratio of the market portfolio, it is possible for the investor to get either a higher or a lower Sharpe ratio by including the test asset, and the direction depends on the magnitude of the alpha. the investor can obtain a higher Sharpe ratio by including the test asset (in addition to the market portfolio) into the optimal portfolio. the investor can only obtain a lower Sharpe ratio by including the test asset (in addition to the market portfolio) into the optimal portfolio.

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