Assume the economy consisted of three types of people. 50% are fad followers, 45

Question

Assume the economy consisted of three types of people. 50% are fad followers, 45% are passive

investors (they have read this book and so hold the market portfolio), and 5% are informed

traders. The portfolio consisting of all the informed traders has a beta of 1.5 and an expected

return of 15%. The market expected return is 11%. The risk-free rate is 5%.

a. What alpha do the informed traders make?

b. What is the alpha of the passive investors?

c. What is the expected return of the fad followers?

d. What alpha do the fad followers make?

Explanation / Answer

Answers
a. 1%
b. 0
c. 10.6%
d.

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