Assume That as a Portfolio Manager the Beta of Your $\quad \mathrm{RFR}=.08 \quad \quad \quad \mathrm{P}_{\mathrm{m}}($

question 124

Multiple Choice

Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML? 1) $\quad \mathrm{RFR}=.08 \quad \quad \quad \mathrm{P}_{\mathrm{m}}($ proxy $) =.11$
2) $\quad \mathrm{R}_{\mathrm{K}}=.07 \quad \quad \quad \quad \mathrm{R}_{\mathrm{m}}($ true $) =.14$

• A) 4.2% lower
• B) 3.6% lower
• C) 3.8% lower
• D) 4.2% higher
• E) 3.6% higher

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Definitions:

Interest Rates

The percentage of a sum of money charged for its use, typically expressed as an annual percentage rate.

Par Value

The face or nominal value of a bond, stock share, or coupon, as specified by the issuer.

Coupon Rate

Annually, the interest earned on a bond represented as a percentage of its face value.

Premium Bond

Bond prices and interest rates are inversely related; that is, they tend to move in the opposite direction from each other. A fixed-rate bond will sell at par when its coupon interest rate is equal to the going rate of interest, rd. When the going rate of interest is above the coupon rate, a fixed rate bond will sell at a “discount” below its par value. If current interest rates are below the coupon rate, a fixed rate bond will sell at a “premium” above its par value.