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.

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Definitions:

Higher Temperature

A condition of increased heat in a given environment or system, often affecting physical states, chemical reactions, and biological processes.

Kilocalories

A unit of energy commonly used to measure the energy content of food, equal to 1,000 calories.

Kinetic Energy

Energy of motion. Compare with potential energy.

Legs

Limbs on animals and humans used primarily for supporting the body and facilitating locomotion or movement.