Cornell University Fall 2010 Economics 3330: Problem Set 7 Due 10/28/10 1. True/False/Explain State whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. a. Finding values of alpha not equal to one in the single factor index regression is clear evidence that CAPM is wrong. b. On average, mutual funds underperform the market when adjusted for risk. 2. Question 6 of Chapter 9 of Text Two investment advisors 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. a. Can you tell which investor was a better selector of individual stocks (aside from the issue of general movements in the market)? b. If the T-bill rate were 6% and the market return during the period were 14%, which investor would be the superior stock selector? c. What if the T-bill rate were 3% and the market return were 15%?
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