Two portfolio managers, Mr. P and Mr. Q, claim that they are both good at picking under-priced stocks. Over the years, the average return on the portfolio managed by Mr. P has been 17%, with standard deviation 15%, while the average return of Mr. Q's portfolio has been 18%, with standard deviation 17%. Over the same period, the average return on the market portfolio has been 15%, with standard deviation 12%. You estimate that the covariance between Mr. P's portfolio and the market has been sPM=0.0173, while the covariance between Mr. Q's portfolio and the market has been sQM=0.0202. Finally, you estimate that the average return on money market funds (a proxy for the risk-free rate of return) has been 5%. a. Compute the expected returns on Mr. P's and Mr. Q's portfolios that would be consistent with Market Model (ie: alpha equals zero under the Market Model). b. Given the Market as the benchmark, are either of the two managers over-performing the market? Explain your answer carefully.
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Two portfolio managers, Mr. P and Mr. Q, claim that they are both good at picking under-priced stocks. Over the years, the average return on the
a. Compute the expected returns on Mr. P's and Mr. Q's portfolios that would be consistent with Market Model (ie: alpha equals zero under the Market Model).
b. Given the Market as the benchmark, are either of the two managers over-performing the market? Explain your answer carefully.
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