Suppose You Have 5-Year Annual Data on the Excess Returns

question 8

Multiple Choice

Suppose you have 5-year annual data on the excess returns on a fund manager’s portfolio (“fund ABC”) and the excess returns on a market index (where is the return on fund ABC, is the risk-free rate and is the return on the market index) :

-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?

• A) 39.5%
• B) 30.7%
• C) 5.4%
• D) 64.8%

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