Problem 1:

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 3 percent and the S&P 500 market risk premium was 27.0 percent for 2013. Using the Capital Asset Pricing Model, provide the benchmark Security Market Line predicted return for each fund in 2013 and place them in the table below.

Fund Manager	2013 Performance	BETA	StdDev	Corr.	SML Predicted Return
Devo	50%	2.00	10%	80%
Grodge	43	1.50	12	50
MsMo	25	0.70	4	70
SpaceMan	24	0.60	5	48

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 MsMo will provide a return of 12% for investors in 2014, while the risk-free rate is 3 percent and the S&P 500 market risk premium is 10.0 percent for 2014. Given these estimates, do you feel that MsMo will out-perform or under-perform the market benchmark? (Circle 0ne)

Out-Perform Under-Perform

d. What is the implied standard deviation of the returns for the Standard & Poor 500 (market return) used to compute the betas in the table above?

e. 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? Is this a good strategy?