Two investment advisers are comparing performance. One averaged a 20% rate of re

Question

Two investment advisers are comparing performance. One averaged a 20% rate of return and the other a 19% rate of return. However, the beta of the first investor was 1.2, whereas that of the second was 1. Can you tell which investor was a better selector of individual stocks (aside from the issue of general movements in the market)? First investor Second investor Cannot determine If the T-bill rate were 5% and the market return during the period were 10%, which investor would be the superior stock selector? Second investor First investor Cannot determine If the T-bill rate were 2% and the market return during the period were 18%, which investor would be the superior stock selector? First investor Second investor Cannot determine

Explanation / Answer

a. Since one investor averaged a 20% rate of return, and the other a 19% rate of return, the first investor was a better selector of individual stocks. b. If the T-Bill rate were 5% and the market return during the period were 10%, yet the first investor would only be the superior stock selector. c. Parallely, if the T-Bill rate were 2% and the market return during the period were 18%, then the second investor would be the superior stock selector.

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