the following 3 questions: Question 8

1. John Galt is a mutual fund manager at Atlas Asset Management. He can generate an alpha of 2% a year up to $500 million of invested capital. After that amount his skills are spread too thin, so he cannot add value and his alpha is zero for all investments over $500 million. Atlas Asset Management charges a fee of 0.80% on the total amount of money under management. Assume that there are always investors looking for positive alpha investments and no investor would invest in a fund with a negative alpha. Assume that the fund is in equilibrium, meaning that no investor either takes out money or wishes to invest new money into the fund.

   The amount of fee income that Galt's fund will generate is closest to:

   a)		$8.00 million
   b)		$3.75 million
   c)		$10.00 million
   d)		$25.00 million

1 points

Question 9

1. Various trading strategies appear to offer non-zero alphas when we examine real world data. If indeed these alphas are positive, it could be explained by any of the following except:

   a)		The positive alpha trading strategies contain risk that investors are unwilling to bear but the CAPM does not capture.
   b)		The market portfolio is inefficient, but the market portfolio proxy used to calculate the alphas is efficient.
   c)		Investors are systematically ignoring positive-NPV investment opportunities.
   d)		A stock's beta with the market portfolio does not adequately measure a stock's systematic risk.

1 points

Question 10

1. Assume that the economy has three types of people. 20% are fad followers, 70% are passive investors, and 10% are informed traders. The portfolio consisting of all informed traders has a beta of 1.2 and an alpha of 2.64%. The market has an expected return of 9% and the risk-free rate is 3%. What is the alpha for the fad followers? Enter your answer as a percentage to two decimal places (i.e. 0.12% rather than 0.0012; the percent sign is not necessary).

1 points

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