Alternative Investments Q7
0. Which of the following is most likely to be correct about return?
- A
Beta, a measure of sensitivity, relative to a particular market index, is a the measure of unsystematic risk.
- B
Owing to existing inefficiencies, a positive return can be earned through exploitation and after adjustment of beta risk. This is defined as an alpha return.
- C
Alpha returns are correlated with beta returns and are presumably the result of managers’ special skills in capturing non-systematic opportunities.
- Option : B
- Explanation : Beta, a measure of sensitivity, relative to a particular market index, is a the measure of unsystematic risk.
→ This is incorrect. Beta measures systematic risk, i.e., the risk related to market movements as a whole, not unsystematic (diversifiable) risk.
Owing to existing inefficiencies, a positive return can be earned through exploitation and after adjustment of beta risk. This is defined as an alpha return.
→ This is correct. Alpha is the excess return earned over the expected return predicted by beta, representing a manager’s skill or an inefficiency exploited in the market.Alpha returns are correlated with beta returns and are presumably the result of managers’ special skills in capturing non-systematic opportunities.
→ This is incorrect. Alpha is meant to be uncorrelated with beta returns, as it represents performance independent of market movements (non-systematic skill-based returns).
