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. Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns i. Alpha ii. Information ratio iii. Sharpe ratio iv. Treynor measure a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.) Stock A % Stock A 1% + 1.2 (rm -rf) 0.635 11.3% 22.6% % Stock B % % Stock B 2% +0.8( rm -rf) 0.466 20.1% 26.9% 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. This 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 that the investor is analyzing to form an actively managed stock portfolio.
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. Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns i. Alpha ii. Information ratio iii. Sharpe ratio iv. Treynor measure a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.) Stock A % Stock A 1% + 1.2 (rm -rf) 0.635 11.3% 22.6% % Stock B % % Stock B 2% +0.8( rm -rf) 0.466 20.1% 26.9% 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. This 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 that the investor is analyzing to form an actively managed stock portfolio.
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
Problem 1PS
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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.
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