To compute the modified benchmark-neutral alpha, we need to subtract the product of the benchmark alpha and the active position beta from the alpha of the active position. This neutralizes the active position's beta relative to the benchmark beta, ensuring that the active position doesn't make a bet on the market (and benchmark portfolio) returns.

Using the given information, we can calculate the modified benchmark-neutral alpha as follows:

Modified benchmark-neutral alpha = Active position alpha - (Benchmark alpha × Active position beta)
= 0.6% - (0.020% × 1.3)
= 0.6% - 0.026%
= 0.574%

Things to Remember

• Active position alpha represents the excess return of the portfolio manager's active position compared to the benchmark.
• Active position beta measures the sensitivity of the portfolio manager's active position to movements in the benchmark.
• Benchmark alpha is the expected return of the benchmark index.
• Benchmark beta is a measure of the benchmark's systematic risk compared to the market.
• Neutralizing the active position with respect to the benchmark beta involves adjusting the active position to have the same beta as the benchmark, effectively removing the market risk factor.
• Modified benchmark-neutral alpha is the alpha of the active position after neutralizing its beta exposure to match that of the benchmark.