Question

Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 8%, and the market's average return was 13%. Performance is measured using an index model regression on excess returns. Index model regression estimates R-square Residual standard deviation, 0(e) Standard deviation of excess returns Stock A 1% + 1.2(M - rf) 0.659 11.7% 238 Stock B 2% + 0.8(IM - rf) 0.478 20.5% 27.7% a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.) Stock A Stock B % ļi. Alpha ii. Information ratio ii. Sharpe ratio iv. Treynor measure b. Which stock is the best choice under the following circumstances? i. This is the only risky asset to be held by the investor. This stock will be mixed with the rest of the investor's portfolio, currently composed solely of holdings in the market-index fund. iii. This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio.

Answer 1

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00:36 W VO ( Ax 33 ENG 02-04-2020 25 ... X - = fx X GS GT - GU GV GW GG GY GZ HA HA GZ346 GR 343 344 345 346 347 Rm = 13%, Rf = 8% return on stock Rp - Rf STOCK A 1% + 1.2(Rm-Rf) 1% + 1.2(13%-8%) 7.00% STOCKB 2% + 0.8 (Rm-Rf) 2% +0.8 (13%-8%) 6.00% 348 349 350 SO APLHA 1.0000% 2.0000% 351 352 INFORMATION RATIO (alpha/residual sd) 0.0855 1%/11.7% 0.0976 2%/20.5% 353 354 SHARPE RATIO (Rp - Rf)/SD 0.3043 7%/23% 0.2166 6.00%/27.7% iv TREYNOR RATIO (Rp - Rf)/BETA 5.8333 7.0/1.2 7.5000 6.0/0.8 355 356 357 358 359 360 361 362 363 364 365 366 (i) (ii) (iii) if this is the only risky asset, use sharpe measure, it is higher for A portfolio mixed with index fund, use appraisal ratio (information ratio), it is higher for B, one of the many portfolios, use treynor ratio, it is higher for B KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... +