Question
In: Finance
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate...
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 7%, and the market’s average return was 14%. 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% + 0.8(rM − rf) |
| R-square | 0.635 | 0.466 |
| Residual standard deviation, σ(e) | 11.3% | 20.1% |
| Standard deviation of excess returns | 22.6% | 26.9% |
a. Calculate the following statistics for each stock (use whole percent values, 1%, not 0.01 for example, for your calculations): (Round your answers to 4 decimal places.)
| Stock A | Stock B | |
| Alpha | ||
| Information ratio | ||
| Sharpe ratio | ||
| Treynor measure |
b. Which stock is the best choice under the following circumstances?
| This is the only risky asset to be held by the investor | |
| This stock will be mixed with the rest of the investor’s portfolio, currently composed solely of holdings in the market-index fund. | |
| This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio. |
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Expert Solution
SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 2 years agoRelated Solutions
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate...
Consider the two (excess return) index-model regression results
for stocks A and B. The risk-free rate over the
period was 8%, and the market’s average return was 14%. 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% + 0.8(rM − rf)
R-square
0.665
0.481
Residual standard deviation, σ(e)
11.8%
20.6%
Standard deviation of excess returns
23.1%
27.9%
a. Calculate the following statistics for each...
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate...
Consider the two (excess return) index-model regression results
for stocks A and B. The risk-free rate over the
period was 7%, and the market’s average return was 15%. 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% + 0.8(rM − rf)
R-square
0.641
0.469
Residual standard deviation, σ(e)
11.4%
20.2%
Standard deviation of excess returns
22.7%
27.1%
a. Calculate the following statistics for each...
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate...
Consider the two (excess return) index-model regression results
for stocks A and B. The risk-free rate over the
period was 6%, and the market’s average return was 15%. 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% + 0.8(rM − rf)
R-square
0.594
0.445
Residual standard deviation, σ(e)
10.6%
19.4%
Standard deviation of excess returns
21.9%
25.5%
a. Calculate the following statistics for each...
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate...
Consider the two (excess return) index-model regression results
for stocks A and B. The risk-free rate over the
period was 5%, and the market’s average return was 14%. 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% + 0.8(rM − rf)
R-square
0.611
0.454
Residual standard deviation, σ(e)
10.9%
19.7%
Standard deviation of excess returns
22.2%
26.1%
a. Calculate the following statistics for each...
Problem 24-9 Consider the two (excess return) index-model regression results for stocks A and B. The...
Problem 24-9
Consider the two (excess return) index-model regression results
for stocks A and B. The risk-free rate over the
period was 5%, and the market’s average return was 15%. 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% +
0.8(rM ? rf)
R-square
0.617
0.457
Residual standard deviation,
?(e)
11%
19.8%
Standard deviation of excess
returns
22.3%
26.3%
a. Calculate the following statistics...
Consider the two (excess return) index model regression results for A and B: RA = –1.8%...
Consider the two (excess return) index model regression results
for A and B:
RA = –1.8% + 2RM
R-square = 0.640
Residual standard deviation = 12.6%
RB = 1.4% + 1RM
R-square = 0.590
Residual standard deviation = 11.4%
If rf were constant at 6% and the regression
had been run using total rather than excess returns, what would
have been the regression intercept for stock A?
(Negative value should be indicated by a minus sign. Round
your answer to...
Consider the two (excess return) index model regression results for stock A and B RA =...
Consider the two (excess return) index model regression results
for stock A and B RA = 0.01 + 1.2RM R2 of 0.576; Std deviation of
error term of 10.3% RB = -0.02 + 0.8RM R2 of 0.436; Std deviation
of error term of 9.1%
a) Which stock has more firm-specific risk? Explain [4
points]
b) Which has greater market risk? Explain [4 points]
c) For which stock does market movement explain a grater
fraction of return variability? Explain [4 points]...
Suppose that the Index Model for the excess returns of stocks A and B is estimated...
Suppose that the Index Model for the excess returns of stocks A
and B is estimated with the following results: RA = 0.01 + 0.80 *
Rm + eA RB = -0.02 + 1.5 * Rm + eB Stdev(Rm)=0.25 Stdev(eA)=0.40
Stdev(eB)=0.20 What is the Standard Deviation of each Stock. What
is the Covariance between Stock A and Stock B. What is the
Correlation between Stock A and Stock B
Suppose that the index model for stocks A and B is estimated from excess returns with...
Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 5.0% + 1.30RM + eA
RB = –2.0% + 1.6RM + eB
σM = 20%; R-squareA = 0.20; R-squareB = 0.12
Break down the variance of each stock to the systematic and
firm-specific components. (Do not round intermediate calculations.
Calculate using numbers in decimal form, not percentages. Round
your answers to 4 decimal places.)
Suppose that the index model for stocks A and B is estimated from excess returns with...
Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 2.6% + 0.90RM +
eA
RB = –2.0% + 1.20RM +
eB
σM = 26%;
R-squareA = 0.21;
R-squareB = 0.12
Assume you create a portfolio Q, with investment
proportions of 0.40 in a risky portfolio P, 0.35 in the
market index, and 0.25 in T-bill. Portfolio P is composed
of 70% Stock A and 30% Stock B.
a....
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