You are given the following information about four portfolios and the market returns. A B C D Market Average Return 12% 10% 15% 20% 8% Beta 1.2 0.8 1 2 1 STD. 20% 16% 30% 45% 15% C Question 7 Ware given the towing inmation about truth and the market w C D Market Average Return 12% 10% 15% 20% 8% Beta STD 1.2 20% 0.8 1 2 1 16% 30% 45% 15% Which stock the best bigportunity if CAPM is your bench? - Question 8 12- 10 Arg Re As per CAPM 9.6 YA: 12x8 = 16.06.864 8-0 157 20 rc = = 1xP: & 2x & : CAPM: re: rf + Blrm.) r re: p(rm) D Market Average Return 12% 10% 15% 20% 8% Beta 1.2 0.8 1 2 1 STD 20% 16% 30% 45% 15% Which platest in this portfol DA OF 0 OD Question 9 1X (11) 17 Diff 2.4 3.6 B A = C: Sharpe Ratio 120 15 20 ..b WA = 0.635 15 WB: T 0 10-75 E (TA): 075 (12): 9. .9375, t (1B) = 08375 (107)-9-375, A 9-8= 1 : 0.5 15 WC: : 36 300 15 0.44 Ho 15 45 0.5, E(rc): 0-8 (15)=2.5 18: C: D 30-333, E(ro) = 0.333 (20):656, - 0046-8 938-f: 1.375" 75-8 o.f 1984 M Measure Easier for Interpretation: differential return relative to a benchmark index Equates the volatility of the managed portfolio with the market by creating a hypothetical portfolio P* made up of T-bills (F) and the managed portfolio (P) E(r) CML CAL(P) M = p-M FIGURE 24.2 M of portfolio P Illustration: Using M Measure Managed Portfolio P return = 35% and Standard Deviation = 42% Market Portfolio M return = 28% and standard deviation = 30% T-bill return = 6% Q: How does this managed portfolio compare to the market portfolio? Step 1: Create A Hypothetical Portfolio P* that has the same risk as the Market: Wp. x 42+ (1 - Wp-) x0 = 30 => Wp--30/42 =0.714 in Portfolio P and 0.286 in T-bills Step 2: Compute the return of the Hypothetic Portfolio: E(rp)=(.714) (.35) + (.286) (.06) = 26.7% Step 3: Compare it to the return of the Market Portfolio M = 26.7% -28% = -1.3% Conclusion: Portfolio P underperformed the Market Portfolio by 1.3%