The Manager of Star Performer Mutual Fund Expects the Fund

question 14

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 0.8. 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:

Nonparametric Statistics

Statistical methods that do not rely on data belonging to any specific distribution.

Normally Distributed

Referring to a distribution that follows a normal curve, characterized by its bell shape and defined by its mean and standard deviation.

Ordinal Data

A type of categorical data in which the order or ranking of the values is significant, but the difference between those values is not necessarily consistent or defined.

Interval Data

A type of quantitative data in which the intervals between values are meaningful and consistent, but there is no true zero point, allowing for the measurement of difference and comparison.