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Portfolio with a beta of 1.40, Average return of 14% over the last 10 years whereas...

Portfolio with a beta of 1.40, Average return of 14% over the last 10 years whereas the market has only averaged 12% over the same period. Portfolio manager believes she has beaten the market. Risk-free rates is 4%, has the portfolio manager beaten the market. Show work & explain

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Answer #1

We need to calculate the return of the portfolio manager in respect to Capital Asset pricing model-

Expected rate of return= risk free rate+(beta X market risk premium)

= 4+1.4(12-4)

= 15.20%

the expected rate of return as per the Capital Asset pricing model was 15.20% but the the fund has only managed to make a return of 14% so the firm has actually underperformed in respect to the market.

The portfolio manager has significantly underperformed in respect to the market rate of return.

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