Question

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. Return		Standard Deviation		Beta
Manager Y	11.00	%	11.80	%	1.30
Manager Z	7.00	%	8.50	%	0.90

Additionally, your estimate for the risk premium for the market portfolio is 4.00 percent and the risk-free rate is currently 4.50 percent.

1. For both Manager Y and Manager Z, calculate the expected return using the CAPM. Round your answers to two decimal places.

   Manager Y:   %

   Manager Z:   %

2. Calculate each fund manager’s average “alpha” (i.e., actual return minus expected return) over the five-year holding period. Round your answers to two decimal places.

   Manager Y:   %

   Manager Z:   %

Answer 1

rate positively ..

	Given that-
	Portfolio	Actual Avg. Return	Standard Deviation	Beta
	Manager Y	11%	11.80%	1.3
	Manager Z	7%	8.50%	0.9
ans a)	Expected return using CAPM= Risk free rate + Market risk premium * Beta
	Required return
	Manager Y =		4.5%+4%*1.3			9.70%
	Manager Z =		4.5%+4%*0.9			8.10%
ans b)	Alpha = Actual return - expected rate of return
	Manager Y =		11%-9.7%			1.30%
	Manager Z =		7%-8.1%			-1.10%