Question

Two investment advisers are comparing performance. One averaged a 15.79% rate of return and the other a 19.34% rate of return. However, the β of the first investor was 1.5, whereas that of the second investor was 1.

Required: Suppose that the T-bill rate was 3% and the market return during the period was 15%. Aside from the issue of general movements in the market, outline the difference between the superior and inferior portfolios.

Answer% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Answer 1

The difference between Superior and inferior portfolio can be gauged from 2 aspects

a) Return generated by Portfolio as compared to Marker Return

b) Portfolio Return per unit of risk as measured by Treynor Measure

Higher the value in both the case, the better is portfolio

In the instance case, Second Portfolio is better, as its Average return is 19.34% whereas Market Return is 15%. Further Portfolio Return per unit of risk of Second portfolio (16.34%) is more than that of First Portfolio (8.53%)

The detailed working is as under