CAS Exam 9 Spring 2016, Question 6
Study guide: Exam 9
Given the following information:
| Portfolio | Total Market Value | \beta |
Average Annual Return |
|---|---|---|---|
| A | $1 million | 0.9 | 7.1% |
| B | $58 million | 1.5 | 7.8% |
| C | $120 million | 1.1 | 6.7% |
- The risk-free rate is 2%.
- The expected market return is 6%.
Part a (1 point)
Calculate the alpha of each portfolio.
Part b (0.5 points)
Describe a market anomaly associated with these three portfolios that appears to contradict the semi-strong form of the efficient market hypothesis.
Part c (0.5 points)
Describe an extension of CAPM that addresses the cause of the anomaly identified in part b. above.
No current syllabus covers this question; it is kept for the record.
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