Question: A single mispriced asset has an alpha = 4.0%, a beta = 1.0 and unsystematic risk (variance) of 16.0%. The market risk premium is 5.0%

A single mispriced asset has an alpha = 4.0%, a beta = 1.0 and unsystematic risk (variance) of 16.0%. The market risk premium is 5.0% and the markets Sharpe Ratio is 0.5. In constructing an optimal allocation between the mispriced asset and the market, what proportion of your investment would you place in the mispriced asset?

a.

20%

b.

15%

c.

10%

d.

5%

e.

The asset is not mispriced

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