Assume the economy consisted of three types of people. 45% are fad followers, 48% are passive investors (they have read this book and so hold the market portfolio), and 7% are informed traders. The portfolio consisting of all the informed traders has a beta of 1.51 and an expected return of 15%. The market expected return is 10%. The risk-free rate is 4%. a. What alpha do the informed traders make? b. What is the alpha of the passive investors?
