Question: You are an analyst for public fund and you have been assigned the task of evaluating portfolio managers, following are data over the past five years: Portfolio Actual Average Return Standard Deviation Beta Security X 10.20% 12.00% 1.20 Security Y 8.80% 9.90% 0.80 Additionally, your estimate for the risk premium for the market portfolio is 5% and the risk-free rate is currently 4.50%.
a. For both X and Y, calculate the expected return using the CAPM
b. Calculate each asset's alpha (actual return minus expected return over the five-year holding period. Show graphically how this can be plot on SML.
c. X and Y - undervalued or overvalued? d. X and Y - buy or sell?