Question
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
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 13%. 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 | 0.588 | 0.442 | |||||||||
Residual standard deviation, (e) | 10.5% | 19.3% | |||||||||
Standard deviation of excess returns | 21.8% | 25.3% | |||||||||
a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)
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 13%. 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 | 0.588 | 0.442 | |||||||||
Residual standard deviation, (e) | 10.5% | 19.3% | |||||||||
Standard deviation of excess returns | 21.8% | 25.3% | |||||||||
a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)
b. Which stock is the best choice under the following circumstances?
Stock A Stock B % I i. Alpha ii. Information ratio iii. Sharpe ratio | iv. Treynor measure | i. This is the only risky asset to be held by the investor. This stock will be mixed with the rest of the investor's 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
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