Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 13% and 15% respectively. The beta of A is 0.8 while that of B is 1.3. The T-bill rate is currently 7% while the expected rate of return of the S&P500 index is at 14%. The standard deviation of portfolio A and B are 20% and 41%, and that of the index is 30%. a. b. C. C. Compare the performance of the two portfolios relative to the market using the four performance measures: Sharpe ratio, Treynor ratio, Jensen's Alpha and M². Comment on the calculated results. Would you choose to add A or B to your holdings if you currently hold a market-index portfolio? Justify your decision. Which portfolio would you choose if instead you could invest only in Treasury bills and one of these portfolios? Explain your answer. Could a portfolio show a higher Sharpe ratio but a lower M² measure at the same time? Explain your answer.
Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 13% and 15% respectively. The beta of A is 0.8 while that of B is 1.3. The T-bill rate is currently 7% while the expected rate of return of the S&P500 index is at 14%. The standard deviation of portfolio A and B are 20% and 41%, and that of the index is 30%. a. b. C. C. Compare the performance of the two portfolios relative to the market using the four performance measures: Sharpe ratio, Treynor ratio, Jensen's Alpha and M². Comment on the calculated results. Would you choose to add A or B to your holdings if you currently hold a market-index portfolio? Justify your decision. Which portfolio would you choose if instead you could invest only in Treasury bills and one of these portfolios? Explain your answer. Could a portfolio show a higher Sharpe ratio but a lower M² measure at the same time? Explain your answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Question
Transcribed Image Text:Based on current dividend yields and expected capital gains, the expected rates of return on
portfolios A and B are 13% and 15% respectively. The beta of A is 0.8 while that of B is 1.3.
The T-bill rate is currently 7% while the expected rate of return of the S&P500 index is at 14%.
The standard deviation of portfolio A and B are 20% and 41%, and that of the index is 30%.
Compare the performance of the two portfolios relative to the market using the four
performance measures: Sharpe ratio, Treynor ratio, Jensen's Alpha and M?. Comment on
the calculated results.
а.
b.
Would you choose to add A or B to your holdings if you currently hold a market-index
portfolio? Justify your decision.
Which portfolio would you choose if instead you could invest only in Treasury bills and
one of these portfolios? Explain your answer.
с.
Could a portfolio show a higher Sharpe ratio but a lower M² measure at the same time?
Explain your answer.
с.
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