Question
Two portfolio managers, DF and QR, claim that they are both good at picking underpriced stocks. Over the years, the average return on the portfolio
Two portfolio managers, DF and QR, claim that they are both good at picking underpriced stocks. Over the years, the average return on the portfolio managed by DF has been 17%, with standard deviation 14%, while the average return of QRs portfolio has been 18%, with standard deviation 15%. Over the same period, the average return on the market portfolio has been 8%, with standard deviation 12%. You estimate that the correlation between DFs portfolio and the market has been DF,M = 0.92, while the correlation between QRs portfolio and the market has been QR,M = 0.96. Finally, the risk-free rate has been constant and is 2%.
- Compute the market beta of DFs portfolio and the market beta of QRs portfolio.
- Compute the CAPM alpha of DFs and QRs portfolios.
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