Question

Explain positive portfolio alpha of 5. if CAPM axiom hold, can alpha be negative. Explain why or why not reffering to relevant axioms from CAPM.

Answer 1

Positive Alpha will be representative of better performance of the specific fund in regards to the market index and positive Alpha of 5 will be reflecting that the fund has performed better than the market index return to the extent of 5%.

If CAPM holds, Alpha cannot be negative because it has been assumed specifically as you made while calculating of Capital Asset pricing model. only if there is premium will be negative Capital Asset pricing model will be providing with negative return.

Capital Asset pricing model will always believe that the market is efficient in nature and hence there will be no scope for generation of a higher rate of return than market.