Question

Two investment advisers are comparing performance. One averaged a 16.22% rate of return and the other a 18.73% 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 of theae two industries has to be calculated in line with the Capital Asset pricing model, which will be used to calculate expected rate of return of these two investors.

Expected rate of return of investor A

= Rf+beta(Rm-Rf)

it can be said that the rate of return on treasury bills are risk free rate because treasury bills are risk free assets.

= 3+1.5(15-3)

= 21%

Expected rate of return of investor B

= 3+1(15-3)

= 15%

It can be seen from the example that investor A has made a return of 18.73% whereas investor B has made a return of 16.22%, Investor B has clearly outperformed.

It can be seen that investor B has outperformed its expected rate of return, and investor A has underperformed it's expected rate of return as per Capital Asset pricing model