Q2

You want to evaluate the stocks X and Y using data in the tablebelow. The risk-freerate,r_f, is3%.

Asset

E(r) /3 a

X Y M	16%1.3 40% 9% 0.9 30% 12%120%

(a) Supposeyou're planningleteitherXorYconstitute your entire risky investment. Whichwould youchoose and why?

(b) Suppose you're planningtoaddasmall amountofeither XorY to your well-diversified portfolio.Whichwould youchooseandwhy?

(c) Suppose you're planning use eitherXorYto exploitmispricingsinthe market. Whichwouldyou choose and why?

(d) WhatistheM²measure for the two stocks?

Nowforma new portfolio,Z,by taking a leveraged positioninassetX. Specifically, invest 150% of your wealth in assetXand financeitwith an appropriateshortposition in the risk-freeasset

(e) What istheTreynormeasure of asset2'?

(f) Whatistheofasset2'?

(g) What istheInformationRatio of asset2'?