Assume that a portfolio underperformed its benchmark by 2% in the most recent month. In this scenario,
　　A. Alpha is "-2%" as it refers to the Outperformance I Underperfonnance Gap.
　　B. Due to underperformance, Alpha is definitely negative and canot be positive.
　　C. Alpha may be positive or negative depending upon Beta and Risk Free Rate.
　　D. Alpha is 2%.
　　Answer:C
　　A. Incorrect. Total Portfolio Retum equals to: Risk Free Retum i.e. RFR + [Beta x (Index return -RFR)] + Alpha. This wAy， Alpha is residual after reducing RFR and Index orbarket Related Retum from Total Retum. It need not be equal to Underperformance Gap of"-2%"
　　B. Incorrect. If Beta of Portfolio is much lower, Market Related Retum will also be lower. This may result in a Positive Alpha in spite ofUnderperformance.
　　C. Correct. A much lower Beta wi1l reduce Market Related Retum and in tum, may. increase the residual Alpha to positive figure. Similarly, a higher beta may result in higher share of Market related retum implying a Negative Alpha. Hence, Alpha may move anywhere depending upon the levels of Beta and RFR.
　　D. Incorrect. Alpha can be any figure depending upon levels of Beta and RFR. Alpha need not be equal to difference in retum of portfolio and index.