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 Manager Z 11.80% 7.30% 1.20 0.60 10.90% 6.50% Additionally, your estimate for the risk premium for the market portfolio is 4.00 percent and the risk-free rate is currently 4.50 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 is -Select- The correct graph is -Select- A. B. E(Ri) 0.12- Rm 0.1 0.08- 0.06. Security market Line 0.04- AlphaY AlphaZ 0.02 SML -1 -0.8 -0.6 -0.4 -0.2 0.2 0.4 0.6 0.8 1.2 1.4 1.6 Betal Security market Line E(Ri) 0.12- Rm 0.1 0.08 ZiphaZ 0.06- 0.04. 0.02 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. D. E(RI)) Security market Line 0.12- 0.1 -0.08- Rm -0.06- ZphraZ 0.04- 0.02 AlphaY SML -1 -06 -0.6 -0.4 -0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 Betal Security market Line E(Ri)] 0.12- Rm 0.1- -0.08 -0.06- 0:04 AlphaY AlphaZ 0.02- 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- Manager Y Manager Z Doutperformed the -Select- on a risk-adjusted basis. er outperformed market expectations in general. Select- market expectations in general. Manager Z -Select- market expectations in general. 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 th 2. either manager outperformed n Manager Y -Select- Manager Z -Select- on a risk-adjusted basis. Don -Select- manager Y manager Z tions in general. ons in general. market expectations in general. 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. either manager outnerformed market expectations in general. Manager Manager -Select- outperformed underperformed market expectations in general. market expectations in general. 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. either manager outperformed market expectations in general. Manager Y market expectations in general. -Select- Manager -Select- Dmarket expectations in general. outperformed underperformed