Question

nswer the following unrelated questions (a&b) regarding risk and return:

a. Based on the following data, compute the Beta for Zebra Corp.:

Month

Market Return(%) Zebra Corp Return(%)

1

3.0

2.6

2

3.0

3.0

3

3.0

6.4

4

-3.0

-6.4

5

-3.0

-2.6

6

-3.0

-3.0

b. The CAPM (Capital Asset Pricing Model) is often used to evaluate the

performance of professional money management. Suppose that

Fraudulent Mutual Fund has a 12-year average annual return of 20%, with

a beta of 2.0. The S&P 500 (market) index grew 16% per year over the

same period, and the average Treasury Bill (risk-free) yield was 5%. The

manager of the fund claims that the reason to buy his fund is that it has

beaten the market by a margin of 4% per year.

Evaluate the manager’s

claim, and should buy the fund?

(Hint: Do you believe that the mutual

2

fund has outperformed the market if the CAPM is valid to represent the

risk-return relationship, i.e. what return would you expect from this fund

given its level of riskiness?)

Answer 1