Four of your best friends from college are now mutual fund managers (maybe you should have kept in touch after graduation). The risk-free rate was 2 percent and the S&P 500 market risk premium was 8 percent for 2020. Using the Capital Asset Pricing Model, provide the benchmark Security Market Line predicted return for each fund and its over/under performance in 2020 and place the answers in the table below. 2020 Standard SML Predicted Fund Manager BETA Performance Deviation Return Over/Under Performance 2.0% Risk-Free Rate 8.0% Market Risk Premium Devo 12% 1.50 9.0% Grodge 11% 0.80 7.0% MsMo 11% 1.20 10.0% SpaceMan 10% 0.50 5.0% a. Which of your friends has the fund with the highest market risk? The highest total risk? Highest Market Risk Highest Total Risk b. Compared to the SML benchmark, which of your friends had the best performance? The worst? Best Performance Worst Performance c. You have estimated that Devo will provide a return of 13% for investors in 2021, while the risk-free rate is 3 percent and the S&P 500 market risk premium is 6.0 percent for 2021. Given these estimates, do you feel that Devo will out-perform or under-perform the CAPM market benchmark? Market Benchmark = Highlight One: Out-Perform Under-Perform d. You have decided to invest 25% of your funds with each of your friends. What will be the beta of your investment portfolio adopting this strategy? Beta = Four of your best friends from college are now mutual fund managers (maybe you should have kept in touch after graduation). The risk-free rate was 2 percent and the S&P 500 market risk premium was 8 percent for 2020. Using the Capital Asset Pricing Model, provide the benchmark Security Market Line predicted return for each fund and its over/under performance in 2020 and place the answers in the table below. 2020 Standard SML Predicted Fund Manager BETA Performance Deviation Return Over/Under Performance 2.0% Risk-Free Rate 8.0% Market Risk Premium Devo 12% 1.50 9.0% Grodge 11% 0.80 7.0% MsMo 11% 1.20 10.0% SpaceMan 10% 0.50 5.0% a. Which of your friends has the fund with the highest market risk? The highest total risk? Highest Market Risk Highest Total Risk b. Compared to the SML benchmark, which of your friends had the best performance? The worst? Best Performance Worst Performance c. You have estimated that Devo will provide a return of 13% for investors in 2021, while the risk-free rate is 3 percent and the S&P 500 market risk premium is 6.0 percent for 2021. Given these estimates, do you feel that Devo will out-perform or under-perform the CAPM market benchmark? Market Benchmark = Highlight One: Out-Perform Under-Perform d. You have decided to invest 25% of your funds with each of your friends. What will be the beta of your investment portfolio adopting this strategy? Beta =
