The general form of the factor model is: R_i = b_1jR₁ + b_i2R₂ + … + b_ijR_j + ε_i, where R_i is the return for manager i, b_i1, b_i2, …, b_ij are manager i’s exposures to asset classes 1 through j, and R₁, R₂,…, R_j are the returns on asset classes 1 through j. The last term, ε_i, is the manager’s return in excess of the exposure-weighted return on a portfolio of fully diversified asset class benchmarks.

Sellier’s portfolio return is:

R_Sellier = 0.35(10.28) + 0.40(9.57) + 0.25(10.05) = 9.9385%

The exposure-weighted return on the benchmark portfolios is:

R_benchmark = 0.35(9.78) + 0.40(8.37) + 0.25(10.20) = 9.3210%

Thus, Sellier’s alpha (ε_i) is 9.9385 – 9.3210 = 0.6175%. This implies that Sellier’s security selection ability earned her portfolio an extra 0.6175%.