Problem 7-03 You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Y and Z). You consider the following historical average return, standard deviation, and CAPM beta estimates for these two managers over the past five years: Portfolio Manager Y Actual Avg. Return Standard Deviation Beta 11.40% Manager Z 11.00% 7.20% 1.20 0.80 6.20% Additionally, your estimate for the risk premium for the market portfolio is 4.00 percent and the risk-free rate is currently 4.00 percent. % a. For both Manager Y and Manager Z, calculate the expected return using the CAPM. Round your answers to two decimal places. Manager Y: Manager Z: % b. Calculate each fund manager's average "alpha" (i.e., actual return minus expected return) over the five-year holding period. Round your answers to two decimal places. Manager Y: Manager Z: % % Choose the correct SML graph. The correct graph i -Select- graph A A. graph B Security market Line graph C Ri) graph D 0.12 0.1 Rm 0.08- ZlphaZ 0.06 0.04 0.02 SML AlphaY -1 -0.8 -0.6 -0.4 -0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Betal B. E(Ri) Security market Line Rm 0.12- 0.1 0.08 Z 0.06 0.04 0.02- AlphaY AlphaZ SML -1 -0.8 -0.6 -0.4 -0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Betal C. E(Ri) -0.12 0.1 Rm-0.08- 0.06 0.04 0.02- Security market Line AlphaY. AlphaZ SML -1 -0.8 -0.6 -0.4 -0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Beta D. E(Ri) 0.12 0.1 0.08- Security market Line ZlphaZ Rm 0.06 0.04 0.02 AlphaY SML -1 -0.8 0.6 -0.4 -0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Betal c. Explain whether you can conclude from the information in Part b if: 1. either manager outperformed the other on a risk-adjusted basis. -Select- outperformed the -Select- on a risk-adjusted basis. 2 Manager Y Manager Z er outperformed market expectations in general. elect- market expectations in general. 2. either manager outperformed market expectations in general. Manager Y -Select- market expectations in general. Manager -Select- market expectations in general. outperformed underperformed