The Manager of Star Performer Mutual Fund Expects the Fund

question 2

Essay

The manager of Star Performer Mutual Fund expects the fund to earn a rate of return of 12% this year.The Beta of the fund's portfolio is.8.If the rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 15%, should you invest in Star Performer? Can you create a portfolio with the same risk as Star Performer Mutual Fund, but with a higher expected rate of return? Explain why in reality, a mutual fund must be able to provide an expected rate of return that is higher than that predicted by the security market line in order for investors to consider the fund an attractive investment opportunity.

---

Definitions:

Treasury Stock

Shares that were issued and later reacquired by the issuing corporation, which do not confer voting rights or pay dividends.

Purchase Price

The amount of money paid to buy a good, service, or asset. It encompasses all forms of considerations including cash, assets, assumed liabilities, and other financial terms involved in a transaction.

Common Stock

An equity security that represents ownership in a corporation, with rights to vote on corporate matters and receive dividends.

Par Common Stock

The nominal or face value assigned to a share of common stock as stated in the corporate charter, which has little relation to its market value.