The yearly returns of a stock (in excess of the risk-free rate), are +1.8%, -0.6%, -0.3%. During that same period, the market portfolio has excess returns of +0.7%, +0.4%, and +0.8%.

	Stock A excess ret.	Market excess ret.
Year 1	1.80%	0.70%
Year 2	-0.60%	0.40%
Year 3	-0.30%	0.80%

In theory, what should be the stock's CAPM alpha with respect to the market?

In practice, what is the stock's CAPM alpha with respect to the market?

In practice, what is the stock's CAPM beta with respect to the market?

Under APT, what is the alpha of a diversified portfolio?

-the market risk premium

-1

-0

-the systematic risk

The yearly returns of Fund A (in excess of the risk-free rate), are 5.00%, 6.32%, -5.20%. The yearly returns of Fund B (in excess of the risk-free rate), are 0.00%, 1.32%, -10.20%.

During that same period, the market portfolio has excess returns of 5.00%, 7.20%, -12.00%.

	Fund A excess return	Fund B excess return	Market excess return
Year 1	5.00%	0.00%	5.00%
Year 2	6.32%	1.32%	7.20%
Year 3	-5.20%	-10.20%	-12.00%

The risk-free rate is 3% per year.

What is Fund A's alpha?

What is Fund B's beta?

Based on your analysis, which fund has the most systematic risk?

-Fund B

-We do not have enough information to tell

-Fund A

-Neither Fund A nor B

If I can hold long positions only in these funds, and expect fund managers to keep performing the same way against the market, which of the following options should I pick?

-Fund A only

-Half in Fund A, Half in Fund B

-Both Fund A and B in proportion of their market value

-Fund B only

Now suppose you can go either long or short (without paying fees), and still expect fund managers to keep performing the same way against the market.

You think the market can either move +5% or -2% next year, but you do not know with what probability.

Which of these positions would give you the highest expected return?

-Long Fund B, short Fund A in the same proportion

-Long Fund A, short Fund B in the same proportion

-Long Fund B only

-Long Fund A and B in proportion of their market value

Assuming you follow your (correct) answer to question 9, what would be the market beta of your portfolio?