Problem: Suppose the economy consisted of three kinds of people. 50% are fad followers, 45% are passive investors (they have read this book and so hold market portfolio), and 5% are informed traders. The portfolio consisting of all the informed traders has beta of 1.5 and an anticipated return of 15%. The market anticipated return is 11%. The risk-free rate is 5%.
Question1. What alpha do the informed traders make?
Question2. What is the alpha of passive investors?
Question3. What is expected return of fad followers?
Question4. What alpha do the fad followers make?