Question

Questions 10-11 refer to the following data: Portfolio Observed Return Beta Residual Vacance 0:20 0.00 0.10 0.5 0201 The risk-free rate is 3% and the expected return and variance of return of the market portfolio is n = 0.15 and ox=0.16. 10. Which of the following statements is correct? (a). Portfolio I performs better according to both Treynor's and Sharpe's indices, (b). Portfolio 2 performs better according to both Treynor's and Sharpe's indices. (c). Portfolio I performs better according to Treynor's index, while portfolio 2 per forms better according to Sharpe's index. (d). Portfolio 2 performs better according to Treynor's index, while portfolio 1 per forms better according to Sharpe's index. 11. Which of the following statements is correct? (a). Portfolio 1 performs better according to both Jensen's and Treynor's indices. (b). Portfolio 2 performs better according to both Jensen's and Treynor's indices. (c). Portfolio 1 performs better according to Jensen's index, while portfolio 2 pre- forms better according to Treynor's index. (d). Portfolio 2 performs better according to Jensen's index, while portfolio 1 per- forms better according to Treynor's index.

Answer 1

Before staring to answer we need to find three ratio of the portfolio. They are Treynor's ratio, Sharpe's ratio and Jenson's alpha.

Formula for Treynor's ratio = (Rp-Rf)/ Beta

Formula for Sharpe's ratio = (Rp-Rf)/ Standard deviation of portfolio excess return

(standard deviation is calculated by using excel formula =stdev(0.17,0.07)

So by calculating the same, we will get

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So for first question option A is correct answer.

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For question 2 Option A is correct answer.