How is Ex Ante Alpha typically computed?

Ex Ante Alpha is a measure used to estimate the expected performance of an investment relative to a benchmark, taking into account the risk taken to achieve those returns. It is primarily computed by subtracting the required return, often determined using a model such as the Capital Asset Pricing Model (CAPM), from the expected return.

This means that if an investment is expected to yield a return of, say, 10%, and the required return based on its risk profile is 6%, the Ex Ante Alpha would be 4%. This metric helps investors understand whether they are likely to receive a premium for the risks they are assuming in their investment; a positive alpha indicates the potential for excess returns above what is required, while a negative alpha suggests underperformance relative to the benchmark.

This approach focuses on future expectations and requires a clear understanding of both the expected and required returns, which is why this calculation is fundamental in assessing potential investments. Other options do not adequately capture the calculation process needed for Ex Ante Alpha, as they either focus on past returns or irrelevant comparisons.