1. Consider the two (excess return) index-model regression results for stocks A and B. The risk-free

rate over the period was 6%, and the markets average return was 14%. Performance is measured

using an index model regression on excess returns.

	Stock A	Stock B
Index model regression estimates	1% + 1.2(rM rf )	2% + 0.8(rM rf )
R-square	0.576	0.436
Residual standard deviation, (e)	10.3%	19.1%
Standard deviation of excess returns	21.6%	24.9%

a. Calculate the following statistics for each stock:

i. Alpha

ii. Information ratio

iii. 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.

ii. This stock will be mixed with the rest of the investors 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.