Two investment advisers are comparing performance. One averaged a 15% rate of re

Question

Two investment advisers are comparing performance. One averaged a 15% rate of return and the other a 12% rate of return. However, the beta of the first investor was 1.7, whereas that of the second investor 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)? O First investor O Second investor O Cannot determine b. If the T-bill rate was 8% and the market return during the period was 8%, which investor would be considered the superior stock selector? Second investor First investor Cannot determine

Explanation / Answer

Assume Investor A has average return 15% Beta of portfolio of investor A 1.7 Assume Investor B has average return 12% Beta of portfolio of investor B 1 Market Beta=1, Market Return 12% Investor A is better selector of stock Because his portfolio has given higher return Answer:First Investor b Assume risk free rate=Rf Expected return of portfolio of A: Rf+1.7*(12-Rf) Rf+20.4-1.7Rf 20.4-0.7Rf=15 Rf=5.4/0.7= 7.714286 If T- bill rate is 8% Rf=8% Expected return of portfolio of A: 8+1.7*(12-8)= 14.8 percent Actual Return 15% Hence The first Investor (A) is considered superior stock selector Answer: First Investor c If T- bill rate is 5% Rf=5% Expected return of portfolio of A: 5+1.7*(12-5)= 16.9 percent Actual Return 15% Hence The first Investor (A) isNOT CONSIDERED superior stock selector Answer: Second Investor

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