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

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.

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