Question

Testing a portfolio for alpha involves regressing the portfolio excess return on the market excess return. What does the p-value from the regression output tell you?

Group of answer choices

the total amount of alpha

the total amount of beta

the probability that the alpha is zero

whether the CAPM is useful or not

Answer 1

The p-value from the regression for alpha indicates how much statistically significant the value of alpha is. If p-value is high it means the value of alpha is statistically significant and vice versa. As per the CAPM the alpha should be zero because the CAPM implies, that αi would be zero for any asset or portfolio of stocks. Thus a high p-value implies that CAPM is not useful in explaining the excess return in the given case whereas a low p-value implies that CAPM holds for the case. So the correct option is the last one: whether the CAPM is useful or not