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Two portfolio managers, Mr. P and Mr. Q, claim that they are both good at picking under-valued stocks. Over the years, the average return on
Two portfolio managers, Mr. P and Mr. Q, claim that they are both good at picking under-valued stocks. Over the years, the average return on the portfolio managed by Mr. P has been 14.1%, with standard deviation 15.5%, while the average return of Mr. Q's portfolio has been 15%, with standard deviation 17%. Over the same period, the average return on the market portfolio has been 12%, with standard deviation 12%. You estimate that the covariance between Mr. P's portfolio and the market has been PM=0.018, while the covariance between Mr. Q's portfolio and the market has been QM=0.0216. Finally, you estimate that the average return on money market funds has been 4% (risk-free rate). (a) Compute the expected returns on Mr. P's and Mr. Q's portfolios that would be consistent with CAPM. (b) Given the CAPM as the benchmark, is either of the two managers out-performing the market portfolio on a risk-adjusted basis
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