Suppose the returns and corresponding beta values for two assets (A and B) and the market (M) are as indicated in the accompanying figure as per below:

(i) Compute the Treynor Index for A and B. Interpret the results.

(ii) Compute the Jensen index for A and B. Interpret the results.

(iii) Suppose one manager had selected a portfolio represented by A and another manager had selected a portfolio represented by B. Would you feel confident in evaluating the managers relative performance with the Treynor or Jensen results? Explain.

Sample mean return .15 .10 TF = .05 A I .5 M 1 Beta 1 1.5 B Sample mean return .15 .10 TF = .05 A I .5 M 1 Beta 1 1.5 B