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There would be a lot more to say if we could take into account that the -2% is the $expected$ return, but the confidence interval for an actual (observed) return can be of any width, e.g. (-22%; 20%). However, we can't compute it here because the problem doesn't supply us with the variance of beta and the error term from the fitted CAPM.


2

I think there is not too much to say. At first glance it looks good if the manager loses $10\%$ if the whole market loses $30\%$. But plugging the beta and the risk-free rate into the CAPM formula we see that we would have expected a loss of $2\%$ only. So the $10\%$ are much worse than expected. Note however that there are various reason's why CAPM just ...


0

I think the best strategy is to follow Ken French who posted all of the Fama-French factors on his website a while ago, including the risk-free rate. The latter is updated at the same frequency as the portolio returns, e.g. you can't use a 3-month - based rate if you work with monthly equity returns.


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The general problem of the investor is: $$ \max_{w\in[0,1]^n} U(\mu_p(w),\sigma_p(w))\quad s.t. \sum_{i=1}^n w_i=1$$ where $w$ being the portfolio weights, and $U$ utility function. CAPM assumes investors with concave utility function $U=\mu_p-\frac{1}{2}\sigma_p^2$, from which then follows that all investors mix the market portfolio with the riskfree ...



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