As a financial director working for a major financial institution, you are asked to evaluate two portfolio managers A and B hired externally. The following performance data based on the last three years is available for your review:

Portfolio	Actual return	St Dev	Beta
A	9.5%	11.5%	1.3
B	9%	10%	0.7

Based on your analysis, you find that the market portfolio has a risk-premium of 6 percent, and the risk-free rate is currently 3.75 percent.

a) Define the Security Market Line (SML) - intercept and slope.

b) Using CAPM, estimate the expected returns for manager A and manager B.

c) Estimate each managers alpha over the last three years. Explain whether alpha will plot above the SML, or below the SML in either case.

d) Given the results in c), can you conclude whether 1) either manager outperformed the other, and 2) any of the managers outperformed market expectations in general.