The expected return of the market portfolio is 8% and the risk-free rate is 2%. Hedge fund A has an expected return of 10%, a beta of 1.5, and a standard deviation of 20%. Hedge fund B has an expected return of 7%, a beta of 0.75, and a standard deviation of 15%. Which fund has the best performance using the CAPM as a benchmark and why? (Hint: do not assume that the CAPM is true; use it as a benchmark to evaluate each funds performance.)

1. Fund A because it has a higher expected return.

2. Fund A because it has a higher Sharpe ratio.

3. Fund B because it has a higher alpha.

4. Fund B because it has a lower beta and a lower standard deviation.