Akins Aggressive Metal fudn is a concentrated mutual fund with a small number of holding, all in the heavy metals mining industry. Brian the portfolio manager is stock picking genius but believes the fund's existing portfolio is currently fairly priced he has therefore been in search of new investment ideas to create value of the fund investors.

He has spent thelast6 weeks combingthroughfinancial statements and reading footnotes about deferred taxes...Basedon this research,he hasidentifiedwhat he believesto be a great new strategy_Brianbelieveshis new strategy willbeatthe market and return10%.The strategyhasa 24% standard deviation and a covariance of 0.010 withinthemarket.Brian willinvest 90% ofthefund's$1.25Bin assetsinthis new strategy,andtheremaining10%will beheldinrisk-free bonds.Assume the CAPM holds andignoresalltaxes,fees,.and expenses.

Youhavethe followingforecasts:

• Expectedreturn on the S&P 500 over the next year = 0.12
• Expectedrisk-free rate over thenextyear = 0.04

Expectedstandard deviation of returns for the S&P 50=0.180

What is the CAPM implied expected return on Brian's new portfolio

If Brian is right about the performance of this strategy, what can you conclude about market efficiency??

Answer rating: 100% (QA)

To calculate the CAPM implied expected return on Brians new portfolio we can use the CAPM formula ER... View the full answer