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Consider the two (excess return) index-model regre...

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Question

Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 4%, and the market?s average return was 11%. 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 0.683 0.49 Residual standard deviation, ?(e) 12.1% 20.9% Standard deviation of excess returns 23.4% 28.5% -------------------------------------------------------------------------------- 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 BStock A ii. This stock will be mixed with the rest of the investor?s 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

 

Paper#10420 | Written in 18-Jul-2015

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