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You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Y and...
You are an analyst for a large public pension fund and you have been assigned the task of
evaluating two different external portfolio managers (Y and Z). You consider the following historical average return, standard
deviation and capm beta estimates for these two managers over the past five years:
Portfolio Actual Avg. ReturnStandard DeviationBeta
Manager Y10.20%12%1.2
Manager Z8.80%9.90%0.8
Additionally, your estimate for the risk premium for the market portfolio is 5% and the risk free rate is currently
4.5%.
a. For both Manager Y and Manager Z, calculate the expected return using the CAPM. Express your answers to the nearest basis point (i.e. xx.xx%)
b. Calculate each fund manager's average "alpha" (i.e. actual return minus expected return) over the five year holding period.
Show graphically where these alpha statistics would plot on the security market line (SML).
