Problem 7-03 You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Y and Z). You consider the following historical average return, standard deviation, and CAPM beta estimates for these two managers over the past five years: Portfolio Actual Avg. Standard Beta Return Deviation Manager Y 13.00% 14.40% 1.20 Manager Z 6.40% 8.40% 0.80 Additionally, your estimate for the risk premium for the market portfolio is 4.00 percent and the risk-free rate is currently 3.50 percent. a. For both Manager Y and Manager Z, calculate the expected return using the CAPM. Round your answers to two decimal places. Manager Y: % Manager Z: % b. Calculate each fund manager's average "alpha" (i.e., actual return minus expected return) over the five-year holding period. Round your answers to two decimal places. Manager Y: % Manager Z: % Choose the correct SML graph. The correct graph is -Select- ^ . Security market Line A. ERS 0127 017 ocet Roost 002 Security market Line B. ERS Rm01 0087 005 0047 0027 -0.6 44 43 1 0 2 0.4 0.6 0. 1 1.2 1.4 16 Beta Security market Line ES 0127 R 0.00 0024 7 :00 4 azt az od doo 112 a 16 Deta Security market Line ERS 0127 Rmoet oost 0045 0021 7 0 0004 02 0.2 0.4 0.6 0.8 1 1.2 c. Explain whether you can conclude from the information in Part b if: 1. either manager outperformed the other on a risk-adjusted basis. -Select- outperformed the -Select- on a risk-adjusted basis. 2. either manager outperformed market expectations in general. Manager Y -Select- market expectations in general. Manager Z -Select- market expectations in general. Problem 7-03 You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Y and Z). You consider the following historical average return, standard deviation, and CAPM beta estimates for these two managers over the past five years: Portfolio Actual Avg. Standard Beta Return Deviation Manager Y 13.00% 14.40% 1.20 Manager Z 6.40% 8.40% 0.80 Additionally, your estimate for the risk premium for the market portfolio is 4.00 percent and the risk-free rate is currently 3.50 percent. a. For both Manager Y and Manager Z, calculate the expected return using the CAPM. Round your answers to two decimal places. Manager Y: % Manager Z: % b. Calculate each fund manager's average "alpha" (i.e., actual return minus expected return) over the five-year holding period. Round your answers to two decimal places. Manager Y: % Manager Z: % Choose the correct SML graph. The correct graph is -Select- ^ . Security market Line A. ERS 0127 017 ocet Roost 002 Security market Line B. ERS Rm01 0087 005 0047 0027 -0.6 44 43 1 0 2 0.4 0.6 0. 1 1.2 1.4 16 Beta Security market Line ES 0127 R 0.00 0024 7 :00 4 azt az od doo 112 a 16 Deta Security market Line ERS 0127 Rmoet oost 0045 0021 7 0 0004 02 0.2 0.4 0.6 0.8 1 1.2 c. Explain whether you can conclude from the information in Part b if: 1. either manager outperformed the other on a risk-adjusted basis. -Select- outperformed the -Select- on a risk-adjusted basis. 2. either manager outperformed market expectations in general. Manager Y -Select- market expectations in general. Manager Z -Select- market expectations in general
