alpha quiz earned, market, 2011

Palantir

If a portfolio had an alpha of negative10 bps, then the portfolio:

A) earned 10 bps less than the market.

B) had less risk than the market.

C) earned 10 bps less than the market on a risk-adjusted basis.



Edited 1 time(s). Last edit at Tuesday, May 24, 2011 at 04:05PM by june2009.

strikethree

Bad question...but I see where they're going with it. Alpha is risk-adjusted excess return. In the case of Jensen's alpha, by using a specific benchmark instead of the proverbial global market, theoretically it's supposed to adjust for risk, but it depends on how you look at it.

Windjam

alpha isnt excess return its unexplained excess return

aidebaobao

In theory alpha should always be on a risk-adjusted returns basis.

Chuckrox

C
Alpha is not an absolute return, it is a relative comparison.

mp3bu

so whats the answer and why

Iginla2011

A.



Edited 1 time(s). Last edit at Tuesday, May 24, 2011 at 04:39PM by Oal29.

Analyze_This

I always thought ALPHA was excess return over some normal benchmark w/o any risk adjustment.

My portfolio earned 10%, my properly specificied benchmark earned 8% = 2% alpha. No matter the risk I undertook to get there. Is alpha not = excess return???

Will give answer in a few.

Zestt

A all the way

Analti_Calte

I think the answer is A. When you look at alpha it is the additional return over the normal benchmark.

The answer would be C if you were computing Jensen's alpha, which adjusts for the risk of the portfolio for the return of the market.