Question: Fund A has higher alpha compared to Fund B, where the alpha has been computed choosing the CAPM as the benchmark asset pricing model. The

Fund A has higher alpha compared to Fund B, where the alpha has been computed choosing the CAPM as the benchmark asset pricing model. The CAPM is assumed to hold in this question.

a. Under what condition could Fund A have a lower Sharpe ratio than fund B, despite the above? Describe in detail the economic interpretation of this result.

b. In such a situation, which investors would prefer fund A?

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