Investment A:
CAPM Alpha = 0.27
3 Factor model alpha = 0.03
Which of the following is correct?
a) Since it has a tilt towards small stocks and value stocks, the 3-Factor Model will reduce the benchmark for this investment relative to the CAPM, thus lowering its alpha in the 3-Factor model
b) Since it has a tilt towards small stocks and value stocks, the 3-Factor Model will increase the benchmark for this investment relative to the CAPM, thus lowering its alpha in the 3-Factor model
