You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Y and Z). You
consider the following historical average return standard deviation and CAPM beta estimates for these two managers over the past five years:
Additionally your estimate for the risk premium for the market portfolio is 5.00 percent and the risk-free rate is currently 4.50 percent.
Actual average return
a) For both Manager Y and Manager Z calculate the expected return using the CAPM. Express your answers to the nearest basis point (i.e. xx.xx%).
b) Calculate each fund manager%u2019s average %u201Calpha%u201D (i.e. actual return minus expected return) over the five-year holding period. Show graphically
where these alpha statistics would plot on the security market line (SML).
c) Explain whether you can conclude from the information in Part b if: (1) either manager outperformed the other on a risk-adjusted basis and (2) either
manager outperformed market expectations in general.