Problem 2

Risk-free rate is 4%. Expected return on actively managed fund P is 16%, expected return on the market index is 12%. Standard deviation of the fund is 20%, and standard deviation of the index is 17%. Beta of the fund is 0.73.

1. Calculate Sharpe ratio of the market index and of fund P. Does the fund beat the market?

2. Calculate Treynor measure of the market index and of fund P. Does the fund beat the market?

3. Calculate the M² measure. Explain what it means.