You are an analyst for a large public pension fund and you have been assigned the task of evaluating 2 different external portfolio managers (Y and Z). You consider the following historical average return, standard deviation and CAPM beta estimates for these 2 managers over the past 5 years : Portfolio Actual Average Return Standard Deviation Beta Manager Y 10.2% 12% 1.2 Manager Z 8.8% 9.9% 0.8 Additionally, your estimate for the risk premium for the market portfolio is 5.00% and the risk-free rate is currently 4.5%.
a) For both Manager Y and Manager Z, calculate the expected return using the CAPM. Express your answers to the nearest basis point (i.e. xx.xx%).
b) Calculate each fund manager's average "alpha" (?) (i.e. actual return minus expected return) over the 5-year holding period. Show graphically where these ? statistics would plot on the security market line (SML).
c) Explain whether you can conclude from the information in Part b if :
i. Either manager outperformed the other on a risk-adjusted basis
ii. Either manager outperformed market expectations in general.