Portfolio Performance Evaluation using CAPM

Very Hard Performance Evaluation Performance Appraisal

Consider a portfolio managed by an investment firm that specializes in active management strategies. Over the past year, the manager has reported a portfolio return of 14%, while the benchmark index, comprised of similar asset classes, has returned 10%. The portfolio has a beta coefficient of 1.2. To evaluate the manager's performance, you calculate the alpha using the Capital Asset Pricing Model (CAPM).

Assume the risk-free rate is 3%. What is the portfolio's alpha, and how well has the manager performed relative to the benchmark after adjusting for systematic risk?

Alpha is 1.8%; the manager outperformed the benchmark.

Alpha is 2.4%; the manager underperformed the benchmark.

Alpha is 4%; the manager significantly outperformed the benchmark.

Hint

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