Question

Two investment advisers are comparing performance. One averaged a 19% rate of return and the other a 16% rate of return. However, the beta of the first investor was 1.5, whereas that of the second was 1.

(i)          Can you tell which investor was a better selector of individual stocks (aside from the issue of general movements in the market)?

(ii)        If the T-bill rate were 6% and the market return during the period were 14%, which investor would be the superior stock selector?

(iii)       If the T-bill rate were 6% and the market return during the period were 14%, which investor would be the superior stock selector?

Answer 1

(1)

Advisor	Returns	Beta	Risk adjusted Returns (Returns / Beta)	Ranking
1	19%	1.5	12.7%	2
2	16%	1	16.0%	1

Therefore 2nd advisor having returns of 16% is better stock selector

(2) Risk Free rate of return = 6%

Market Rate of Returns = 14%

Market Risk Premium = 8%

Advisor	Returns	Returns over Risk Free returns	Beta	Risk adjusted Returns (Premium Returns / Beta)	Ranking
1	19%	13%	1.5	8.7%	2
2	16%	10%	1	10.0%	1

2nd Adivsor is superior stock selector

(3) Question 2 and 3 are exactly same.