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CAPM and risk free return

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Two mutual fund managers are being evaluated for their performance in the last ten years. One of them, Mr. Harrods, has achieved an eye-popping 34% annual average return; the other, Ms. Evans, has obtained a modest 12% annual average return. On closer examination of their portfolios, it is found that Mr. Harrods always bet on risky Argentinian stocks (whose beta is 4), whereas Ms. Evans always invested in conservative technology firms like IBM (whose beta is

(a) If the risk-free return was 3% every year and the expected market return was 11% every year, who should get the higher bonus? Why? (Credit only if reasoning is correct.)

(b) If the risk-free return was 7% every year and the expected market return was 13% every year, who should get the higher bonus? Why? (Credit only if reasoning is correct)

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Solution Summary

The Solution finds the performance of two managers based on the rate of returns earned from their investments.

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Umut Oltulu, MBA
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  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
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