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(r_M ? r_f)	2% + 0.8(r_M ? r_f)
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 1 year ago

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