Question

QUESTION 31 Kumar Consulting operates several stock investment portfolios that are used by firms for investment of pension plan assets. Last year, one portfolio had a realized return of 12.6 percent and a beta coefficient of 1.15. The average T-bond rate was 7 percent and the realized rate of return on the S&P 500 was 12 percent. What was the portfolio's alpha?

Answer 1

Answer:

The portfolio's alpha is - 0.15%

Explanation:

For computing the portfolio's alpha, first, we have to compute the expected rate of return. The formula is shown below:

Expected rate of return = Risk free rate of return + Beta × (realized rate of return - free rate of return)

= 7% + 1.15 × (12% -  7%)

= 7% + 1.15 × 5%

= 7% + 5.75%

= 12.75%

Now the portfolio alpha equal to

= Expected rate of return -  portfolio realized rate of return

=  12.75% - 12.6%

= - 0.15%