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The table below gives performance statistics for two mutual funds, the blue and the red fund. It also shows the market return and the risk-free
The table below gives performance statistics for two mutual funds, the blue and the red fund. It also shows the market return and the risk-free rate.
Expected return: Blue 8% Red 4% Market 5% Risk fee 1%
Standard deviation: Blue 40% Red 60% Market 10% Risk fee 0%
beta: Blue 2 Red 0.5 Market 1 Risk fee 0
Which fund over-performed the best relative to the CAPM?
a. Red because it has the lowest beta.
b. Red because it has the highest alpha
c. Blue because it has the highest alpha
d. Blue because it has the highest expected return
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