Question: a. A mutual fund with beta of .8 has an expected rate of return of 14%. If r_f =5%, and you expect the rate of return on the market portfolio to be 15%, should you invest in this fund? What is the fund's alpha?
b. What passive portfolio comprised of a market-index portfolio and a money market account would have the same beta as the fund? Show that the difference between the expected rate of return on this passive portfolio and that of the fund equals the alpha from part (a).