A mutual fund manager claims that he has achieved a positive Jensen Measure over the past five
Question:
A mutual fund manager claims that he has achieved a positive Jensen Measure over the past five years by studying companies' price/earnings ratio.
(a) (5 points) You run a regression of the monthly excess returns of the fund manager's portfolio on the market excess returns, and find the following: = 0.2% and (e) = 1%.How many months must we observe this manager before we can be 90% confident that his Jensen measure is truly different than zero ( > 0)?(To be 90% confident, t() must be at least 1.65.)
(b) (4 points) Besides the statistical issues with the Jensen Measure, state two other reasons why investors may not want to invest in the mutual fund now.((1), continued)
(c) (4 points) Suppose stocks with low price/earnings ratio have higher arithmetic average returns than stocks with high price/earnings ratio.Briefly explain why this result may not violate semi-strong form efficiency.
(d) (5 points) After you graduate you decide to start a new fund: you think that people are conservative and will underreact to good earnings news.Try to persuade investors to invest in your fund by arguing that you are able to generate abnormal profits from market inefficiencies.