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Leno4ka [110]
3 years ago
5

Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of th

e first adviser was 1.5, while that of the second was 1.a. Can you tell which adviser was a better selector of individual stocks (aside from the issue of general movements in the market)?O First Investment AdvisorO Second Investment AdvisorO Cannot be determinedb. If the T-bill rate were 6% and the market return during the period were 14%, which adviser would be the superior stock selector?O First Investment AdvisorO Second Investment AdvisorO Cannot be determinedc. What if the T-bill rate were 3% and the market return 15%?O First Investment AdvisorO Second Investment AdvisorO Cannot be determined
Business
1 answer:
pentagon [3]3 years ago
4 0

Answer (A):

Need more data to select the better adviser

<u>Explanation: </u>

Adviser A averaged 19% return on the investment which is more than that of Adviser B who averaged 16% return on investment. However, adviser A has a beta of 1.5 which is also greater than that of Adviser B who has a beta of 1. This means that adviser A made a more riskier investment and hence a higher average return on investment. We need more data to tell which adviser performed better in relation to each other.

Answer (B):

Investment Adviser B

<u>Explanation:</u>

R_{f} = T-bill rate = 6%

R_{m} = Market return = 14%

R_{m} - R_{f} = Market risk premium = 14% - 6% = 8%

ER_{a} = Average Return by Adviser A =19%

\beta _{a} = Beta of Adviser A = 1.5

ER_{b} = Average Return by Adviser B =16%

\beta _{b} = Beta of Adviser B = 1

CAPM Equation is ER_{i} = R_{f} +\beta  (R_{m} - R_{f} ) +\alpha

<u>For Adviser A</u>

ER_{i} = 6 + 1.5 (14 - 6) = 18%

The expected average return for the investment is 18% which means that Adviser A over performed the market by 1 %

<u>For Adviser B</u>

ER_{i} = 6 + 1 (14 - 6) = 14%

The expected average return for the investment is 14% which means that the Adviser B over performed the market by 2 %

Clearly, Adviser B performed better than Adviser A.

Answer (C):

Adviser B

<u>Explanation:</u>

<u />

In this part, the R_{f} = 3 % and R_{m} = 15%

All else remains the same

We make similar calculation as in part B

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