An analyst wants to evaluate Portfolio X, consisting entirely of U.S. common stocks, using both the Treynor and Sharpe measures of portfolio performance. The following table provides the average annual rate of return for Portfolio X, the market portfolio (as measured by the Standard and Poor’s 500 Index), and U.S. Treasury bills (T-bills) during the past eight years. Rate Annual Averageof Return STANDARD DEVIATION OF RETURN BETA Portfolio X 10 13 0.40 S&P 500 12 10 1.00 T-bills 7 n/a n/a n/a = not applicable Calculate both the Treynor measure and the Sharpe measure for both Portfolio X and the S&P 500. Round your answers for the Treynor measure to one decimal place and for the Sharpe measure to three decimal places. Treynor measure Sharpe measure Portfolio X 7.5
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
An analyst wants to evaluate Portfolio X, consisting entirely of U.S. common stocks, using both the Treynor and Sharpe measures of portfolio performance. The following table provides the average annual
| Rate Annual Averageof Return |
STANDARD DEVIATION OF RETURN | BETA | |
| Portfolio X | 10 | 13 | 0.40 |
| S&P 500 | 12 | 10 | 1.00 |
| T-bills | 7 | n/a | n/a |
| n/a = not applicable |
- Calculate both the Treynor measure and the Sharpe measure for both Portfolio X and the S&P 500. Round your answers for the Treynor measure to one decimal place and for the Sharpe measure to three decimal places.
Treynor measure Sharpe measure Portfolio X 7.5 S&P 500 5
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