York University - MFIN 5800 A portfolio manager has maintained an actively managed portfolio with a beta of 0

Answer:

As per CAPM;

required rate = risk free rate + beta*(market return - risk free rate).

risk free rate = 5%

market return = -30%.

beta =0.20.

When the expected return on the market is −30% the expected return on a portfolio with a beta of

0.2 is

0.05 + 0.2 × (−0.30 − 0.05) = −0.02

or –2%. The actual return of –10% is worse than the expected return.

The portfolio manager done 8% worse than a simple strategy of forming a portfolio that is 20% invested in an equity index and 80% invested in risk-free investments.