FRM Part II · FRM Exam Part II · Factor Theory
A portfolio has a beta of 1.2 to the market factor. The risk-free rate is 2%, the market return is 8%, and the portfolio returned 11%. Using a single-factor model, what is the portfolio's alpha?
Alpha is 1.8%. The factor model expects a return of 2% plus 1.2 times the 6% market premium, or 9.2%. The portfolio earned 11%, so the excess over what its market exposure explains is 1.8%.
- A1.8%Correct
- B3.0%
- C-1.8%
- D0.8%
Explanation
Expected return = 2% + 1.2 x (8% - 2%) = 9.2%. Alpha = 11% - 9.2% = 1.8%. The 3.0% option ignores beta and the risk-free rate adjustment, comparing 11% with 8%. The -1.8% option reverses the sign.
Did you get it right without looking?
One question tells you little. A timed set on Factor Theory shows your real accuracy, how long you take and where you lose marks.
More Factor Theory questions
- A pension fund allocates to value, momentum, and low volatility factor strategies. The risk team wants diversification across factors during…
- A pension fund compares two ways of diversifying its portfolio: spreading capital across asset classes (equities, credit, real estate, commo…
- A fund combines a value tilt and a momentum tilt in a single smart beta strategy. Historically value and momentum returns have been negative…
- A risk manager reviews an equal-weighted smart beta equity index that rebalances quarterly. Compared with a cap-weighted index, which exposu…
- A risk manager notes that a small-cap value fund has historically delivered returns beyond its market beta. The manager wants to explain thi…
- A portfolio manager explains to a client that the equity risk premium and the credit spread on corporate bonds are both compensation for exp…