Question

Two investment advisers are comparing performance. One averaged a 15.46% rate of return and the other a 20.53% 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 return on treasury bills has to be considered as a risk free rate of return and the return of these Investors are to be calculated as per Capital Asset pricing model.

Expected Return of investor A= Rf+b(Rm-Rf)

= 3+1.5(15-3)

= 21%

Expected return of investor B= 3+1(15-3)

= 15%

It can be seen that investor A has manage a rate of return of 20.53%, whereas investor B has managed a return of 15.46%.

it can be said that investor B has outperformed the expected rate of return whereas investor has not been able to outperform the expected rate of return