Question
Problem 24-9 Consider the two (excess return) index-model regression results for stocks A and B. The riskfree rate over the period was 6%, and the
Problem 24-9
Consider the two (excess return) index-model regression results for stocks A and B. The riskfree 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% + .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 answer to 4 decimal places. Omit the "%" sign in your response.) |
Stock A | Stock B | ||||||||||
i. | Alpha | % | % | ||||||||
ii. | Information ratio | ||||||||||
iii. | Sharpe measure | ||||||||||
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. | (Click to select)Stock BStock A | |||||||||
ii. | This stock will be mixed with the rest of the investors portfolio, currently composed solely of holdings in the market-index fund. | (Click to select)Stock AStock B | |||||||||
iii. | This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio. | (Click to select)Stock BStock A | |||||||||
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