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

Question

Quizplus · Accepted Answer

Required return A = 5% + 1.5(13% - 5%) = 17%
Required return B = 5% + 1.2(13% - 5%) = 14.6%
αA = Actual return A - Required return A = 20% - 17% = 3%
αB = Actual return B - Required return B = 15% - 14.6% = .4%

Two Investment Advisers Are Comparing Performance