Alpha measures the excess return fund compared benchmark after adjusting for risk return
| S&P500 | 0.115 |
|---|---|
| rf | 0.07 |
Which mutual fund performed better on a risk-adjusted basis, i.e. RE: alpha?
Pick the best answer, e.g. less negative alpha - closer to 0 - is better.
Both funds delivered the same alpha of risk-adjusted returns
Answer
S&P500: Return = 0.115
Risk-Free Rate (rf): Return = 0.07
Alpha_A = 0.139 - (0.07 + 1.8 * (0.115 - 0.07))
Alpha_A = 0.139 - (0.07 + 1.8 * 0.045)
Alpha_B = 0.13 - (0.07 + 1.5 * (0.115 - 0.07))
Alpha_B = 0.13 - (0.07 + 1.5 * 0.045)
Alpha_A ≈ -0.012
Alpha_B ≈ -0.0075
