Suppose you have 5-year annual data on the excess return on...

Suppose you have 5-year annual data on the excess return on a fund manager's portfolio ("fund ABC") and the excess returns on a market index (where rABC is the return on fund ABC. Rf is the risk free rate and rM is the return on the market Year t Excess return on fund ABC rABC,t - rf,t Excess return on market index rM,t - rf,t 1 14.0 16.0 2 32.0 21.7 3 11.6 6.0 4 21.2 16.2 5 17.4 11.0 What is the estimated alpha (?) for Fund ABC? 2.3 3.3 4.3 5.3 Suppose that the unbiased estimator of the standard deviation of the disturbance(s) is 5.1. What is the nearest value to the standard errors of the estimated CAPM alpha of Fund ABC. 3.5 4.5 5.5 6.5 The estimated alpha (?) and beta (?) of a rival fund, Fund DEF, are 2.3 and 3.1, respectively. If the expected market risk premium is 12%, what would we expect the excess return of Fund DEF to be? 39.50% 30.70% 5.40% 64.80%

Transcript

00:01 Firstly, we need to evaluate that what is the estimated alpha for fund abc.

00:06 So, over here we have excess return on fund abc denoted as ra to be 14, 32, 11 .6, 21 .2 and 17 .4.

00:37 Then excess return on market index denoted as r to be 16, 21 .7, 6, 16 .2, 11.

01:00 Then evaluating average excess return denoted as ra dash.

01:09 So, 14 wherein we add 32, wherein we add 11 .6, wherein we add 21 .2 to which we add 17 .4 is then divided by 5.

01:21 So, equating it we get the value to be 19 .44.

01:27 Then evaluating r dash which is 16 wherein we add 21 .7 to which we add 6 to which we add 16 .2, wherein we add 11 is then divided by 5.

01:40 So, the value then is 14 .78.

01:45 Then covariance ra, r is then evaluated as 14 wherein we subtract 3 to which we subtract 19 .44 is multiplied by 16 wherein we subtract 14 .78 to which we add 32, wherein we subtract 3, wherein we subtract 19 .44 is multiplied by 21 .7, wherein we subtract 14 .78.

02:24 Then we add 11 .6, wherein we subtract 3, wherein we subtract 19 .44 which is then multiplied by 6, wherein we subtract 14 .78 to which we add 21 .2, wherein we subtract 3, wherein we subtract 19 .44 is then multiplied by 16 .2, wherein we subtract 14 .78 to which we add 17 .4, wherein we subtract 3, wherein we subtract 19 .44 is then multiplied by 11, wherein we subtract 14 .78.

03:01 So, equating it we get the value, sorry it is then divided by 4.

03:05 So, equating it we get the value to be approximately negative 7 .155.

03:11 Next, variance denoted as r is then evaluated as 16, wherein we subtract 14 .78 whole square to which we add 21 .7, wherein we subtract 14 .78 whole square to which we add 6, wherein we subtract 14 .78 whole square to which we add 16 .2, wherein we subtract 14 .78 whole square to which we add 11, wherein we subtract 14 .78 whole square which is then divided by 4.

03:52 So, the value then is approximately 11, sorry 18 .72.

03:57 Then calculating the value of beta as minus 7 .155 divided by 18 .72...

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