Banking and Finance:

3. Funds A and B are actively managed. Consider the following information about the perfor- mance of the two funds. Return St. Dev. Beta Fund A Fund B Market portfolio | Risk-free asset | 12% | 40% | 0 18% | 30% | 1.5 15% 5% | 20% 0 (a) Explain how fund A may have a beta of 0. In reality, which type of funds seek to achieve such beta? (6 points) (b) Suppose investors had access to diversified portfolios. Which fund should investors have chosen to add to their portfolios? (9 points) 3. Funds A and B are actively managed. Consider the following information about the perfor- mance of the two funds. Return St. Dev. Beta Fund A Fund B Market portfolio | Risk-free asset | 12% | 40% | 0 18% | 30% | 1.5 15% 5% | 20% 0 (a) Explain how fund A may have a beta of 0. In reality, which type of funds seek to achieve such beta? (6 points) (b) Suppose investors had access to diversified portfolios. Which fund should investors have chosen to add to their portfolios? (9 points)