RSK4805 ASSIGNMENT 3 2026 - COMPLETE ANSWERS

, RSK4805
ASSIGNMENT 3 2026
DUE 4 SEPTEMBER 2026
QUESTION 1

Question 1.1 (4 marks)
To calculate the return earned by the hedge fund manager, we use the Capital Asset Pricing Model
(CAPM) to find the expected return and then add the alpha.

From the text, the expected return based on the CAPM is:
E(R) = Rf + β (Rm - Rf) (Hull, 2023:9)

Where:
 Rf (Risk-free rate) = 6% or 0.06
 β (Beta) = 1.2
 Rm (Return from the market last year) = 11% or 0.11

Expected Return = 6% + 1.2 * (11% - 6%)
Expected Return = 6% + 1.2 * (5%)
Expected Return = 6% + 6% = 12%

Alpha (α) is the extra return earned by the manager. The text defines alpha as:
α = Rp - Rf - β (Rm - Rf) (Hull, 2023:12)

The return earned (Rp) is the expected return plus the alpha:
Return Earned = Expected Return + Alpha
Return Earned = 12% + 2% = 14%

Answer: The hedge fund manager earned an annual return of 14%.