Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bond rate was 5% and the market return during the period was 13%, which advisor was the better share picker?
A)Advisor A was better because he generated a larger alpha
B)Advisor B was better because he generated a larger alpha
C)Advisor A was better because he generated a higher return
D)Advisor B was better because he achieved a good return with a lower beta

Question

Quizplus · Accepted Answer

Advisor A generated a larger alpha, which measures the excess return over the benchmark (T-bond rate + beta * (market return - T-bond rate)). Advisor A's alpha is 20% - (5% + 1.5 * (13% - 5%)) = 10%, while Advisor B's alpha is 15% - (5% + 1.2 * (13% - 5%)) = 7.6%.

Two Investment Advisors Are Comparing Performance