Look back at Problem 3 in Chapter 7. The risk-free interest rate in each of these years was as follows:

2003 2004 2005 2006 2007 Interest rate% 1.01 1.37 3.15 4.73 4.36

a. Calculate the average return and standard deviation of returns for Ms. Sauros’s portfolio and for the market. Use these figures to calculate the Sharpe ratio for the portfolio and the market. On this measure did Ms. Sauros perform better or worse than the market?

b. Now calculate the average return that you could have earned over this period if you had held a combination of the market and a risk-free loan. Make sure that the combination has the same beta as Ms. Sauros’s portfolio. Would your average return on this portfolio have been higher or lower?

Explain your results.

AppendixLO1