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You are evaluating a stock mutual fund that is among your employers 401k fund electives....

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Accounting

You are evaluating a stock mutual fund that is among your employers 401k fund electives. The fund is actively managed and seeks to outperform the S&P 500. Over the past 10 years, the fund returned 10.25% per year and had a beta = 0.8. Over the same period, the S&P 500 returned 10% and the risk-free rate was 3%. A colleague asked your opinion of the fund. Recalling the principles from FINC 561, you inform the colleague that the fund produced positive alpha meaning that the funds manager was able to find under-priced stocks thereby beating the market. Your colleague (who has not taken FINC 561) challenges your assertion stating: The fund returned 10.25%, barely more than the S&P 500. I wouldnt call 0.25% meaningful alpha heck its not that much better than a S&P 500 index fund. Comment on your colleagues assertion. Do you agree? Why or why not? Explain.

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