Question

4- X , a portfolio managers advertises that he has outperformed the market each year over the last 5 years-since inception of the fund. He compares his performance with the S and P 500 index. However, the beta of his portfolio is 1.25. Assume the following: Return on Sa and P annualized + 12 percent return on his portfolio + 15 percent. Did he outperform the market? Explain and provide exact detail as to why/why not.

Answer 1

Beta of portfolio is 1.25
Camparison of portfolio performance with S&P 500 index
Beta of portfolio denotes times of change in portfolio compare to change in index
Here, if S&P index changes by 1 then portofolio will change by 1.25
Its given that,
Index return is 12%
Portfolio return is 15%
Using Beta value,
Portfolio return		= Index return x beta of portfolio
		= 12% x 1.25
Portfolio return		= 15%
As portfolio return is in line with index return it can be said that portfolio is not outperformed the market