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:

Variable Costs

Expenses that fluctuate in proportion to the activity or quantity of goods produced.

Operating Income

Earnings before interest and taxes, representing the profit from a company's core business operations.

Unit Selling Price

The amount of money charged to the customer for each individual unit of a product or service.

Unit Variable Costs

The variable costs that are incurred for each unit of production, including materials and labor directly associated with the manufacturing of the product.