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b) You observe the following data (All variables are reported on an annualised basis): Average Standard Return Deviation Beta 0.8 Stock A Stock B 11%
b) You observe the following data (All variables are reported on an annualised basis): Average Standard Return Deviation Beta 0.8 Stock A Stock B 11% 14% 10% 31% 1.5 Market index 12% 20% 1.0 Risk-free asset 6% 0% 0.0 (i) Calculate the Jensen's alpha values for stock A and stock B. Based on the alpha values, discuss if you would like to purchase or sell the securities (20% weighting) (ii) Suppose you allocate 1 million investment each for stock A and stock B. A hedge fund requires you to pay fees for the investments these stocks. Explain the maximum fee you would be willing to pay the hedge fund for the investment in each stock? (15% weighting) (iii) Calculate the Sharpe measure and Treynor measure for stock A and stock B. Based on the measures, discuss which stock is preferred if you hold only one of the two stocks. (15% weighting) (Total 100% weighting)
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