1. You are faced with two portfolios which you have been asked to rank in terms of selectivity. You have the following information: 

Risk-free rate is 4% 

Return on the market portfolio is 8% 

Return on portfolio A is 17% 

Return on portfolio B is 16% 

Actual beta of Portfolio A is 1.2, while target beta is 1 

Actual beta of Portfolio B 1.0, while target beta is 0.9 

Standard deviation of Portfolio A is 17% 

Standard deviation of Portfolio B 15% 

Standard deviation of the market portfolio is 7% 

Using Fama Decomposition, calculate the following for each portfolio:  

1. a) Return from Investor's risk 
2. b) Return from Manager's risk 
3. c) Return from Diversification 
4. d) Return from Net Selectivity 

1. e) Rank the performance of both portfolios based on return from selectivity and comment on your results

Answer rating: 100% (QA)

a Return from Investors risk Return from market risk Residual return Expected return Portfolio A Ret... View the full answer