{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

IPM_Quize3(a)_Solution

# IPM_Quize3(a)_Solution - BUS 415 INVESTMENT AND PORTFOLIO...

This preview shows pages 1–2. Sign up to view the full content.

BUS 415: INVESTMENT AND PORTFOLIO MANAGEMENT SPRING 2011, AUBG Quiz 3(a) Problem 1 (10 points): Tow investment advisers are comparing performance. One averages 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 1.0. a. (2 points) Can you tell which investor was a better selector of individual stocks (aside from the issue of general movements in the market)? b. (4 points) 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. (4 points) What if the T-bill rate were 3% and the market return were 15%? Solution: r 1 = 19%; r 2 = 16%; β 1 = 1.5; β 2 = 1 a. To determine which investor was a better selector of individual stocks we look at abnormal return, which is the ex-post alpha; that is, the abnormal return is the difference between the actual return and that predicted by the SML . Without information about the parameters of this equation (risk-free rate and market rate of return) we cannot determine which investor was more accurate.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 3

IPM_Quize3(a)_Solution - BUS 415 INVESTMENT AND PORTFOLIO...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online