The Manager of Star Performer Mutual Fund Expects the Fund

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Examlex · Accepted Answer

The Answer is The CAPM implies that the expected rate of return that investors will demand of the portfolio is:
r = rf + b(rm-rf) = 5% + 0.8 × (15%-5%) = 13%
If the portfolio is expected to provide only a 12% rate of return, it is an unattractive investment.The portfolio does not provide an expected return that is sufficiently high relative to its risk.
A portfolio that is invested 80% in a stock index mutual fund (with a Beta of 1.0) and 20% in Treasury bills or a money market mutual fund (with a Beta of zero) would have the same Beta as Star Performer Mutual Fund:
b = (0.80 × 1.0) + (0.20 × 0) = 0.80
However, the portfolio will provide an expected return of:
(0.80 × 15%) + (0.20 × 5%) = 13%
This is better than the expected return for Star Performer Mutual Fund.
The security market line provides a benchmark expected return that an investor can earn by mixing index funds with money market funds.Before an investor places funds with a professional mutual fund manager, the investor must be convinced that the mutual fund can earn an expected return (net of fees) in excess of the expected return available on an equally risky index fund strategy.

The Manager of Star Performer Mutual Fund Expects the Fund

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