Question

A portfolio manager has maintained an actively managed portfolio with a beta of 0.2. During the last year, the risk-free rate was 5% and major equity indices performed very badly, providing returns of about −30%. The portfolio manager produced a return of −10% and claims that in the circumstances it was good.

A) Discuss this claim, was it a good return, why or why not?

B) What is the expected return on a portfolio with a beta of 0.2? (Show your calculation)

Answer 1

Answer A

As we have calculated above, Expected return of the portfolio is -6%, However portfolio has given return of -10%.

Which menas portfolio has underperformed by 4%. Therefore it is evident to say that manager claim is not correct as portfolio has declined the value of the holders by 4%.

Answer B

Since, Actively managed poortfolio is having beta 0.2. And the major equity indices are providing return of -30%.

Therefore,

Expected Return of the portfolio = Changes in Market Return x beta

                                                = -30% x 0.2

                                                = -6%

Therefore, Portfolio of Manager is expectedto give Return of -6%.