Question: (PLEASE PROVIDE FORMULA and SOLUTIONS TO EACH ANSWER) Assume the economy consisted of three types of people. 50% are fad followers, 45% are passive investors

(PLEASE PROVIDE FORMULA and SOLUTIONS TO EACH ANSWER) Assume the economy consisted of three types of people. 50% are fad followers, 45% are passive

investors (they have read this book and so hold the market portfolio), and 5% are informed

traders. The portfolio consisting of all the informed traders has a beta of 1.5 and an expected

return of 15%. The market expected return is 11%. The risk-free rate is 5%.

a. What alpha do the informed traders make? (Include formula with answer)

b. What is the alpha of the passive investors? (Include formula with answer)

c. What is the expected return of the fad followers? (Include formula with answer)

d. What alpha do the fad followers make? (Include formula with answer)

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