1. Two portfolio managers, Mr. P and Mr. Q, claim that they are both good at picking under-priced stocks. Over the years, the average return of the portfolio managed by Mr. P was 14%, with a standard deviation 15.5%, while the average return of Mr. Qs portfolio was 17.5%, with a standard deviation 17%. Over the same period, the average market return was 12%, with a standard deviation 12%. I have estimated that the covariance between Mr. Ps portfolio and the market was PM=0.018, while the covariance between Mr. Qs portfolio and the market was QM=0.0216. Finally, the risk-free rate is 2%.

   (a) Compute the expected returns of Mr.Ps and Mr.Qs portfolios that would be consistent with the CAPM. (b) Using the CAPM as the benchmark ,are the two managers out-performing the market? (c) If both Mr.Ps and Mr.Qs average returns reflects the expected returns , what should be the implied beta of each fund? What can you say about the estimated covariance with the market for each fund?