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FRM Part I · FRM Exam Part I · Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)

A regression of a fund's monthly excess returns on the market's monthly excess returns yields an intercept of 0.30% per month, with a t-statistic of 0.8. Which interpretation is most appropriate?

The alpha is not statistically significant. The intercept estimates the fund's risk-adjusted outperformance, but a t-statistic of 0.8 is below the roughly 2 needed at the 5% level, so the 0.30% monthly alpha cannot be distinguished from random sampling noise.

  1. AThe fund's alpha is not statistically significant, so outperformance cannot be distinguished from chanceCorrect
  2. BThe fund has significantly outperformed after adjusting for market risk
  3. CThe fund's beta is not significantly different from zero
  4. DThe regression R-squared must be below 0.30

Explanation

The intercept is the estimated alpha. A t-statistic of 0.8 is well below the roughly 2 needed for significance at 5%, so the positive alpha may be sampling noise. The t-statistic for alpha says nothing about beta or R-squared.

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