1) An investment advisor is comparing performance of two mutual funds each of which is designed to outperform the S&P 500.
The Freedelity Fund returned 19%
The JPStanley Fund returned 16%.
Based on the information above, which is the better fund in terms of the manager’s ability to select stocks?(5 pts)
Group of answer choices Freedelity Fund has better stock selection JP Stanley Fund has better stock selection S&P 500 Index Fund has better stock selection Freedelity & JP Stanley Funds have the same level of stock selection Cannot tell from information provided
2) An investment advisor is comparing performance of two mutual funds each of which is designed to outperform the S&P 500.
The Freedelity Fund returned 19%
The JPStanley Fund returned 16%.
The betas of the Freedelity & JPStanley funds are 1.5 & 1.0 respectively.
T-Bill rate = 6%; and the S&P 500 returned 14%.
Which fund was the superior performer? Why? (10 Points)
3) You are evaluating a stock mutual fund that is among your employer’s 401k fund electives. The fund is actively managed and seeks to outperform the S&P 500. Over the past 10 years, the fund returned 10.25% per year and had a beta = 0.8.
Over the same period, the S&P 500 returned 10% and the risk-free rate was 3%.
Calculate the fund’s CAPM alpha. (10 points)
4) You are evaluating a stock mutual fund that is among your employer’s 401k fund electives. The fund is actively managed and seeks to outperform the S&P 500. Over the past 10 years, the fund returned 10.25% per year and had a beta = 0.8.
Over the same period, the S&P 500 returned 10% and the risk-free rate was 3%.
A colleague asked your opinion of the fund. Recalling the principles from FINC 561, you inform the colleague that the fund produced positive alpha – meaning that the fund’s manager was able to find under-priced stocks thereby beating the market. Your colleague (who has not taken FINC 561) challenges your assertion stating:
“The fund returned 10.25%, barely more than the S&P 500. I wouldn’t call 0.25% meaningful alpha – heck it’s not that much better than a S&P 500 index fund.”
Comment on your colleague’s assertion. Do you agree? Why or why not? Explain. (10 points)
5) Assume a fictitious world where there are four stocks:
General Electric (GE)
CitiGroup (C)
British Petroleum (BP)
FaceBook (FB)
The market is in equilibrium where CAPM assumptions hold (e.g. homogeneous expectations, efficient markets, zero transaction costs, etc.)
Express the equilibrium condition for this universe of stocks in terms of each stock’s return contribution and risk contribution. For notation purposes, you can use the symbols rmkt
& σmkt
to represent the market’s return & risk and rf
to represent the risk-free rate. (Note: Students can either type or neatly hand-write the relationship and upload a picture or file containing the expression.) (15 pts)(MUST ATTACH COMPLETED FILE FOR THIS QUESTION)
6) Assume a fictitious world where there are four stocks:
General Electric (GE)
CitiGroup (C)
British Petroleum (BP)
FaceBook (FB)
The market is in equilibrium where CAPM assumptions hold (e.g. homogeneous expectations, efficient markets, zero transaction costs, etc.)
Describe in words, the equilibrium relationship from Question #6 above. (10 pts)
7) Assume a fictitious world where there are four stocks:
General Electric (GE)
CitiGroup (C)
British Petroleum (BP)
FaceBook (FB).
The market is in equilibrium where CAPM assumptions hold (e.g. homogeneous expectations, efficient markets, zero transaction costs, etc.)
What would be the market’s response if the ratio of the contribution to the market’s risk premium divided by the contribution to the market’s variance is higher for BP and lower for FB vs. the other two stocks? (15 pts)
8) Return data for mutual fund XYZ, the S&P 500, and 90-day T-Bills can be found in the
attached Excel file
.
a) Plot the risk premium of Fund XYZ vs. the market premium (10 pts)
b) What is Fund XYZ’s beta?Hint: use the “slope function” in Excel. (5 pts)
c) What is Fund XYZ’s alpha? Hint: use the “intercept function” in Excel. (5 pts)
Upload the completed Excel file below. (SEE FILE ATTACHEMENT FOR EXCEL SHEET MENTIONED IN THIS QUESTION).