Question
In: Finance
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 for each stock: (Round your answers to 4 decimal places.)
ALPHA
INFORMATION RATIO
SHARPE RATIO
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
ii. the stock will be mixed with the rest of the investor's portfolio, currently composed solely of holdings in the market index fund
ii. this is one of many stocks the investor is analyzing to form an actively managed stock portfolio
Solutions
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 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...
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...
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]...
Problem 8-13 Suppose that the index model for stocks A and B is estimated from excess...
Problem 8-13
Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 3.80% + 1.25RM +
eA
RB = -1.80% + 1.60RM +
eB
σM = 18%;
R-squareA = 0.24;
R-squareB = 0.18
Assume you create portfolio P with investment
proportions of 0.60 in A and 0.40 in B.
a. What is the standard deviation of the
portfolio? (Do not round your intermediate
calculations. Round your answer to 2...
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.)
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