Problem:
Assume the economy consisted of three types of people. 50% are fad followers, 45% are passive investors (they have read this book and so hold the market portfolio), and 5% are informed traders. The portfolio consisting of all the informed traders has a beta of 1.5 and an expected return of 15%. The market expected return is 11%. The risk-free rate is 5%.
Required:
Question 1: What alpha do the informed traders make?
Question 2: What is the alpha of the passive investors?
Question 3: What is the expected return of the fad followers?
Question 4: What alpha do the fad followers make?
Note: Explain in detail and show all computations in proper way.