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Assume that you have been appointed as an analyst for a large superannuation fund and you have been asked to evaluate the performance of two portfolio managers (A and B). The following are the historical average returns, standard deviations, and the beta estimates associated with the Capital Asset Pricing Model for the two managers over the past 5 years:
Portfolio Manager
Actual Average Return
Standard Deviation
Beta
A
8.8%
7%
0.55
B
10.8%
13%
1.40
The return on the market portfolio is 7% and the risk-free rate is 2%.
(i) Calculate the expected returns using the CAPM for Manager A and Manager B.
(ii) You have learned from your post graduate course that the 'alpha' is the actual return minus expected return over the period under evaluation. Calculate the alpha for each portfolio manager and evaluate their performance against the CAPM benchmark and explain if either manager outperformed the expectations of the benchmark.
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