The manager of Star Performer Mutual Fund expects the fund to earn a rate of return of 12% this year. The beta of the fund's portfolio is 0.8. If the rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 15%, should you invest in Star Performer? Can you create a portfolio with the same risk as Star Performer Mutual Fund, but with a higher expected rate of return? Explain why in reality, a mutual fund must be able to provide an expected rate of return that is higher than that predicted by the security market line in order for investors to consider the fund an attractive investment opportunity.

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The Answer of The manager of Star Performer Mutual Fund expects the fund to earn a rate of return of 12% this year. The beta of the fund's portfolio is 0.8. If the rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 15%, should you invest in Star Performer? Can you create a portfolio with the same risk as Star Performer Mutual Fund, but with a higher expected rate of return? Explain why in reality, a mutual fund must be able to provide an expected rate of return that is higher than that predicted by the security market line in order for investors to consider the fund an attractive investment opportunity.

The Manager of Star Performer Mutual Fund Expects the Fund