= Problem 2 (Required, 30 marks) The following table shows the betas and actual expected returns of 4 mutual funds in the market: Beta Actual expected return Fund 1 0.5 7.2% Fund 2 0.8 10% Fund 3 1.4 12% Fund 4 1.9 16% The return rate of riskfree asset is rf = 5% and the market portfolio exists. You are given that Exactly two of the funds perform better than the market expectation (i.e. Actual expected return is strictly higher than market expected return) Exactly one of the funds performs worse than the market expectation. (a) Which of the funds lie on security market line (SML)? Explain your answer. (Hint 1: Try to draw a suitable figure and visualize the problem.) (Hint 2: Which performance indexes will be useful in this context?) (b) A fund manager launches a new fund (called Fund X) which 25% of the capital will be invested in Fund 1, 35% of the capital will be invested in Fund 3 and 40% of the capital will be invested in Fund 4. Compute the Jensen alpha and Treynor ratio of the Fund X. = Problem 2 (Required, 30 marks) The following table shows the betas and actual expected returns of 4 mutual funds in the market: Beta Actual expected return Fund 1 0.5 7.2% Fund 2 0.8 10% Fund 3 1.4 12% Fund 4 1.9 16% The return rate of riskfree asset is rf = 5% and the market portfolio exists. You are given that Exactly two of the funds perform better than the market expectation (i.e. Actual expected return is strictly higher than market expected return) Exactly one of the funds performs worse than the market expectation. (a) Which of the funds lie on security market line (SML)? Explain your answer. (Hint 1: Try to draw a suitable figure and visualize the problem.) (Hint 2: Which performance indexes will be useful in this context?) (b) A fund manager launches a new fund (called Fund X) which 25% of the capital will be invested in Fund 1, 35% of the capital will be invested in Fund 3 and 40% of the capital will be invested in Fund 4. Compute the Jensen alpha and Treynor ratio of the Fund X