Assume four stocks with alphas of 1%, 2%, 5%, and 10%. Also assume that the value-weighted fraction of stocks with forecasts is 0.8. Given an equal weighting of 0.2 for each forecast, average alpha is: A. 4.5%. B. 3.5%. C. 8.0%. D. 3.6%.
By assuming four stocks with alphas of 1%, 2%, 5%, and 10%, value-weighted fraction of 0.8, and equal weighting for each stock of 0.2 for the forecasts, average alpha is: (.2 * .01 + .2 * .02 + .2 * 0.05 + .2 *.1) / .8 = 4.5%
