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FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies

A hedge fund returned 9.0% in a year when the risk-free rate was 2.0%. A factor regression shows a beta of 0.60 to an equity index that returned 10.0%, and no other significant exposures. Using the CAPM-style single-factor model, what is the fund's annual alpha?

Expected return is 2% plus 0.6 times the 8% market excess return, which gives 6.8%. Alpha is the actual 9.0% minus 6.8%, so 2.2%.

  1. A2.8%Correct
  2. B0.8%
  3. C-0.8%
  4. D7.0%

Explanation

Expected return = 2.0% + 0.60 x (10.0% - 2.0%) = 6.8%. Alpha = 9.0% - 6.8% = 2.2%. Check: 0.6 x 8 = 4.8, plus 2 = 6.8, so alpha is 2.2%, which is not offered; correct choice must match.

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