You are tasked with evaluating if a company is fairly priced. The fund is actively managed and
Question:
You are tasked with evaluating if a company is fairly priced. The fund is actively managed and seeks to outperform the S&P 500. Over the past 10 years, the fund returned 10.25% per year and had a beta = 0.8.
Over the same period, the S&P 500 returned 10% and the risk-free rate was 3%.
A colleague asked your opinion of the fund. Recalling the principles from CAPM, you inform the colleague that the fund produced positive alpha - meaning that the fund’s manager was able to find underpriced stocks thereby beating the market.
Your colleague challenged your assertion stating
The fund returned 10.25%, barely more than the S&P 500. I wouldn’t call 0.25% meaningful alpha - heck it’s not that much better than a S&P 500 index fund.”
Comment on your colleague’s assertion. Do you agree? Why or Why not? Explain.
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe