Asset Return Benchmarks a) Over the past year, the hedge fund UvA Associates earned a return of 10%, while VU Capital Management has earned a return of 5%. Over the same time period, the return on the Euronext 100 was 7.5%. Do you need any more information to determine which of the two hedge funds performed better last year? If so, what information do you need? b) Suppose you live in a world where the CAPM is correct. The risk-free rate is 1%. UvA Associates has a market beta of 1.39 while VU Capital Management has a market beta of 0.4. Which fund performed better last year, and by how much? c) Now suppose you live in a world explained by the Fama-French three- factor model. Unlike the CAPM, this model has three risk factors. One is the same as the CAPM model --- the return on the market net of the risk-free rate. The other two are a firm size factor (defined as the extra return earned by small firms) and a Book- to-Market factor (defined as the extra return earned by value firms with high B-M ratios). UvA Associates has a firm size beta of -0.3 and a Book-to-Market beta of 0.2. VU Capital Management has a firm size beta of 0.5 and a Book-to-Market beta of 1.2. The extra return for small firms is 6%, while the extra return for value firms is 5%. The other information is the same as parts (a) and (b). According to the three-factor model, which fund performed better last year and by how much?