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A portfolio generates an annual return of 23.5%, a beta of 0.5, and a standard deviation...

A portfolio generates an annual return of 23.5%, a beta of 0.5, and a standard deviation of 25.5%. The market index return is 19.0% and has a standard deviation of 23.5%. What is the M2 measure of the portfolio if the risk-free rate is 4%?

2.72%

2.17%

2.97%

3.23%

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Answer #1

The M2 measure of the portfolio if the risk-free rate is 4% is computed as shown below:

= 0.235 / 0.255

= 0.9216 Approximately

So the weight in risk free asset will be:

= 1 - 0.9216

= 0.0784

= 0.9216 x 0.235 + 0.0784 x 0.04

= 0.2197 Approximately

So the M2 measure will be:

= 21.97% - 19%

= 2.97%

So the correct answer is option of 2.97%

Feel free to ask in case of any query relating to this question

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