FAMA Net Selectivity Model CA Final AFM

Question: The returns of a portfolio A and market portfolio for the last 12 months are indicated as follows: Month Portfolio A Market Portfolio January -0.52 0.82 February 2.20 0.04 March 2.17 2.80 April 4.17 1.72 May 2.04 0.27 June 3.00 0.39 July 1.99 1.95 August 4.00 0.64 September -1.38 1.53 October 2.67 2.70 November 3.99 2.52 December 1.86 2.09 Standard Deviation (σ) 1.6223 0.9498 (i) You are required to find out the monthly returns attributable to the sheer skill of the Portfolio Manager. (ii) What part of the monthly return is attributable to the higher risk assumed by the Portfolio Manager? Assume that the risk-free rate of return is 12% per annum and the portfolio is fully diversified.