Question
You have collected 6 years of monthly data on return of funds ABC and XYZ as well as on S&P/TSX composite index and the government
You have collected 6 years of monthly data on return of funds ABC and XYZ as well as on S&P/TSX composite index and the government short term bills (risk-free). You have run two (excess return) index-model regressions for the two bonds and the results are as follows:
For ABC
rp - rf = .017 + 1.2(rm - rf)+2.3(rm-rf)^2 R^2 = 0.92
For XYZ
rp - rf = .011 + 1.6(rm - rf)+1.0(rm-rf)^2 R^2 = 0.75
All regression coefficients are statistically significant at 1% confidence interval.
a. Which fund has a higher systematic risk? Why?
b. Which fund has a higher residual risk? Why?
c. Which fund has a higher abnormal return? Why?
d. The risk-free rate over the period was 5 percent, and the markets average return was 15 percent. Standard deviation of excess return for ABC and XYZ are 20% and 25%. Calculate Sharpe and Treynors measure for each fund.
e. Which manager shows a better ability to time the market?
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