Two Investment Advisors Are Comparing Performance

question 42

Multiple Choice

Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bond rate was 5% and the market return during the period was 13%, which advisor was the better share picker?

• A)Advisor A was better because he generated a larger alpha
• B)Advisor B was better because he generated a larger alpha
• C)Advisor A was better because he generated a higher return
• D)Advisor B was better because he achieved a good return with a lower beta

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Definitions:

Fixed Costs

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance premiums, remaining constant regardless of activity levels.

Break-Even Point

The juncture where the cumulative expenses equal total income, yielding neither a profit nor a loss.

Contribution Margin

The amount by which sales revenue exceeds variable costs of production, indicating how much revenue contributes towards covering fixed costs and generating profit.

Break-Even Sales

The amount of revenue from sales that equals the sum of the fixed and variable costs of production, resulting in zero net profit or loss.