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-bill rate was 5% and the market return during the period was 13%,which advisor was the better stock 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

To determine which advisor was the better stock picker, we need to analyze their performance relative to the market and risk exposure. Both advisors outperformed the T-bill rate and the market return of 13%. However, Advisor A generated a higher return of 20% compared to Advisor B's 15% return. Moreover, Advisor A had a higher portfolio beta of 1.5 compared to Advisor B's 1.2 beta, indicating higher risk exposure. Therefore, Advisor A generated a larger alpha by outperforming the market by a greater margin, making them a better stock picker.

Two Investment Advisors Are Comparing Performance