Posted: September 21st, 2016

The Efficiency of the Market Portfolio

Davita Spencer is a manager at Half Dome Asset Management. She can generate an alpha of
2% a year up to $100 million. After that her skills are spread too thin, so cannot add value and
her alpha is zero. Half Dome charges a fee of 1% per year on the total amount of money under
management (at the beginning of each year). Assume that there are always investors looking for
positive alpha and no investor would invest in a fund with a negative alpha. In equilibrium, that
is, when no investor either takes out money or wishes to invest new money,
a. What alpha do investors in Davita’s fund expect to receive?
b. How much money will Davita have under management?
c. How much money will Half Dome generate in fee income?