IPM_Quize3(a)_Solution

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

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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
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This note was uploaded on 09/25/2011 for the course FINA 4320 taught by Professor John during the Spring '11 term at Houston Baptist.

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

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