You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Y and Z). You consider the following historical average return, standard deviation, and CAPM beta estimates for these two managers over the past five years: Portfolio Actual Avg. Return Standard Deviation Beta Manager Y 10.20% 12.00% 1.20 Manager Z 8.80% 9.90% 0.80 Additionally, your estimate for the risk premium for the market portfolio is 5.00 percent and the risk-free rate is currently 4.50 percent. a. For both Manager Y and Manager Z, calculate the expected return using the CAPM. Express your answers to the nearest basis point (xx.xx percent). b. Calculate each fund manager's average "alpha" (actual return minus expected return) over the five-year holding period. Show graphically where these alpha statistics would plot on the security market line (SML). c. Explain whether you can conclude from the information in part (b) if (I) either manager outperformed the other on a risk-adjusted basis, and (2) either manager outperformed market expectations in general.
You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Y and Z). You consider the following historical average return, standard deviation, and CAPM beta estimates for these two managers over the past five years: Portfolio Actual Avg. Return Standard Deviation Beta Manager Y 10.20% 12.00% 1.20 Manager Z 8.80% 9.90% 0.80 Additionally, your estimate for the risk premium for the market portfolio is 5.00 percent and the risk-free rate is currently 4.50 percent. a. For both Manager Y and Manager Z, calculate the expected return using the CAPM. Express your answers to the nearest basis point (xx.xx percent). b. Calculate each fund manager's average "alpha" (actual return minus expected return) over the five-year holding period. Show graphically where these alpha statistics would plot on the security market line (SML). c. Explain whether you can conclude from the information in part (b) if (I) either manager outperformed the other on a risk-adjusted basis, and (2) either manager outperformed market expectations in general.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
| You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external |
| Portfolio | Actual Avg. Return | Standard Deviation | Beta |
| Manager Y | 10.20% | 12.00% | 1.20 |
| Manager Z | 8.80% | 9.90% | 0.80 |
| Additionally, your estimate for the risk premium for the market portfolio is 5.00 percent and the risk-free rate is currently 4.50 percent. |
| a. For both Manager Y and Manager Z, calculate the expected return using the CAPM. Express your answers to the nearest basis point (xx.xx percent). |
| b. Calculate each fund manager's average "alpha" (actual return minus expected return) over the five-year holding period. Show graphically where these alpha statistics would plot on the security market line (SML). |
| c. Explain whether you can conclude from the information in part (b) if (I) either manager outperformed the other on a risk-adjusted basis, and (2) either manager outperformed market expectations in general. |
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