2.8 - Alpha, Beta and Hypothesis Testing

Question 1

Ex-ante Alpha

Answer 1

• Anticipated incremental return on an investment

α = E(Ri) - {Rf + β[E(Rm) - Rf]}

Question 2

Ex-post Alpha

Answer 2

• idiosyncratic return
• realized incremental return after adjusting for time value of money and systematic risks

εi = Ri - {Rf + βi[E(Rm) - Rf]}

Question 3

Calc of test statistic

Answer 3

Tstat = (sample mean - hypothesized mean) / standard Error

Question 4

Test statistics

Answer 4

If tstat is lower than critical value, it’s not large enough to reject the null hypothesis

Question 5

P-value

Answer 5

If p-value is lower than significance level of test, null hypothesis should be rejected