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 8%, 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 8%, 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% + .8(rM rf) | |||||||||
| R-square | 0.665 | 0.481 | |||||||||
| Residual standard deviation, (e) | 11.8% | 20.6% | |||||||||
| Standard deviation of excess returns | 23.1% | 27.9% | |||||||||
| 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 AStock B | |||||||||
| 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 BStock A | |||||||||
| 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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