Calculate the expected rate of return for each portfolio

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CAPM. During a 5-year period, the relevant results for the aggregate market are that the rf(risk-free rate) is 8 percent and the rm (return on market) is 14 percent. For that period, the results of four portfolio managers are as follows.

Portfolio Manager

Average Return (%)

Beta

A

13

0.80

B

14

1.05

C

17

1.25

D

13

0.90

(a) Calculate the expected rate of return for each portfolio manager and compare the actual returns with the expected returns.

(b) Based upon your calculations, select the manager with the best performance.

(c) What are the critical assumptions in the capital asset pricing model (CAPM)? What are the implications of relaxing these assumptions? (CFA, adapted.)

Reference no: EM13574523

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