Theme 40. Finance and the formation of an investment portfolio

Task 7. Determine the alpha for assets A and B from CAPM model

For example, assuming that the actual return of the fund is 30, the risk-free rate is 8%, beta is 1.1, and the benchmark index return is 20%, alpha is calculated as:

Alpha = (0.30-0.08) – 1.1 (0.20-0.08) = 0.088 or 8.8%
The result shows that the investment in this example outperformed the benchmark index by 8.8%. The forecast was wrong, but the investor received unexpected profit.

Find alpha of assets A and B, if their real rate of return were 30% and 15%. The risk-free rate is 3%.

Alpha A = 30 – 3 – 1,53 x (15 – 3) = 27 – 1,53 x 12 = 27 – 18.36 = 8,64

Alpha B = 15 – 3 – 0,37 х (15 – 3) = 12 – 0,37 x 12 = 12 – 4,44 = 7,56

These results showed that the assets were undervalued and the investor received more profit than predicted.