Question

a. The Python Fund’s managers make active bets on 10 securities every quarter, and their forecasted alphas have a correlation with realized alphas of 0.20. Calculate the ex-ante information ratio (Fundamental Law of Active Management) for the Python Fund. (4 marks)

b.  Johnny Mac is an analyst who wants to compute the alpha on the Centric Fund for last month.

He has gathered the following information:

Centric Fund Return        8.00%

Risk-Free Rate 1.20%

Exposure to S&P 500     1.30

S&P 500 Return                4.50%

Calculate Centric Fund’s alpha for last month. (6 marks)

Answer 1

actual return		8%
Risk free rate of return	1.20%
beta			1.3
expected rate of return (Ke)	4.50%
Alpha = Actual Return - (Beta * RM)
Here, we need RM. For Calculating the RM we use the formula of CAPM
Ke = Rf + β*(Rm - Rf)
we have, Ke = 4.50, Rf = 1.2, β = 1.3
now, we can calculate Rm by applying the CAPM
Rm = 5.31
Alpha = 8% - (1.3-5.31)
Alpha = 1.097