The Alpha fund has a beta of 1.5 and earned a 25% return over a period in which the market portfolio earned 15% and the risk-free rate was 5%.
a) Plot the risk and return of the Alpha fund relative to the security market line (CAPM). Identify all relevant points.
b) Compute the Alpha fund’s return due to selectivity. Identify it on the Graph.
c) Compute the Alpha fund’s return due to systematic risk. Identify it on the graph.