An investor wants to use his/her saving to buy shares of a mutual fund. A manager in a security firm recommend two different stock funds. In order to select a better fund, the manager provides the following return history records of these two funds: Year 2017 2018 2019 2020 2021 2022 2023 Market Index Date Jan 1st, 2017 Jan 1st,2018 Fund A Fund B Net Asset Value at Return of Year Net Asset Value at year end (Million) year end (Million) Jan 1st, 2019 Jan 1st, 2020 Jan 1st, 2021 Jan 1st, 2022 Jan 1st, 2023 185.35 257.77 244.96 269.26 280.68 316.72 298.03 An investment Bank disclose the forecast of annual return on market index at the beginning of each year as the following table. Assume the T-bill annual rate is 1%. Expected Return 27.83% 39.07% -4.97% 9.92% 4.24% 12.84% -5.90% 20.63% 31.64% -4.40% 13.03% 6.11% 17.17% -7.05% Return of Year 2295.22 30.41% 3374.43 47.02% 3089.62 -8.44% 3396.12 9.92% 3585.62 5.58% 4037.05 12.59% 3890.10 -3.64%

An investor wants to use his/her saving to buy shares of a mutual fund. A manager in a security firm recommend two different stock funds. In order to select a better fund, the manager provides the following return history records of these two funds: An investment Bank disclose the forecast of annual return on market index at the beginning of each year as the following table. Assume the T-bill annual rate is 1%. A. Let us consider two different periods: (i) From Jan 1st, 2017 to Jan 1st, 2020; (ii) From Jan 1st, 2020 to Jan 1st, 2023. Both funds adjusted the betas of their portfolios in 2020 due to the COVID shock (Let us assume the adjustment occurs on Jan 1st, 2020 roughly). Fund A held a portfolio with a beta of 1.2 during period (i) and 0.8 during period (ii). Fund B held a portfolio with a beta of 1.6 during period (i) and 0.7 during period (ii). Please calculate the annual returns predicted by CAPM for Fund A and Fund B at the beginning of two periods (Jan 1st, 2017 and Jan 1st, 2020) respectively. (Hint: use the expected market return on Jan 1st, 2017 and Jan 1st, 2020 as the expected market return at the beginning of two periods respectively) B. Do you think the adjustment of beta will help to both funds and explain why? C. During each two periods (i) and (ii) defined in A, which fund's manager do you think did a better job based on CAPM? Explain why. An investor wants to use his/her saving to buy shares of a mutual fund. A manager in a security firm recommend two different stock funds. In order to select a better fund, the manager provides the following return history records of these two funds: An investment Bank disclose the forecast of annual return on market index at the beginning of each year as the following table. Assume the T-bill annual rate is 1%. A. Let us consider two different periods: (i) From Jan 1st, 2017 to Jan 1st, 2020; (ii) From Jan 1st, 2020 to Jan 1st, 2023. Both funds adjusted the betas of their portfolios in 2020 due to the COVID shock (Let us assume the adjustment occurs on Jan 1st, 2020 roughly). Fund A held a portfolio with a beta of 1.2 during period (i) and 0.8 during period (ii). Fund B held a portfolio with a beta of 1.6 during period (i) and 0.7 during period (ii). Please calculate the annual returns predicted by CAPM for Fund A and Fund B at the beginning of two periods (Jan 1st, 2017 and Jan 1st, 2020) respectively. (Hint: use the expected market return on Jan 1st, 2017 and Jan 1st, 2020 as the expected market return at the beginning of two periods respectively) B. Do you think the adjustment of beta will help to both funds and explain why? C. During each two periods (i) and (ii) defined in A, which fund's manager do you think did a better job based on CAPM? Explain why