FINC 100 TUV Beta High & Market Risk CAPM Return & SML Predicted Returns Worksheet

Problem 2

Four of your best friends from college are now mutual fund managers (maybe you

should have kept in touch after graduation).The risk-free rate was 2 percent and the

S&P 500 market risk premium was 8 percent for 2020.Using the Capital Asset

Pricing Model, provide the benchmark Security Market Line predicted return for

each fund and its over/under performance in 2020 and place the answers in the table below.

Fund Manager

2020

BETA

Standard Deviation

SML Predicted Return

Over/Under Performance

Performance

Devo

12%

1.50

9.0%

2.0%

Risk-Free Rate

Grodge

11%

0.80

7.0%

8.0%

Market Risk Premium

MsMo

11%

1.20

10.0%

SpaceMan

10%

0.50

5.0%

a. Which of your friends has the fund with the highest market risk?The highest

total risk?

Highest Market Risk

Highest Total Risk

b. Compared to the SML benchmark, which of your friends had the best

performance? The worst?

Best Performance

Worst Performance

c. You have estimated that Devo will provide a return of 13% for investors in 2021,

while the risk-free rate is 3 percent and the S&P 500 market risk premium is 6.0 percent for 2021.

Given these estimates, do you feel that Devo will out-perform or under-perform the CAPM market benchmark?

Market Benchmark =

Highlight One:

Out-Perform

Under-Perform

d. You have decided to invest 25% of your funds with each of your friends.What will

be the beta of your investment portfolio adopting this strategy?

Beta =