Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate- market's average return was 14% Performance is measured using an index model regression on exce Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns L ii. iii. Alpha Information ratio Sharpe ratio Trevnor measure Stock A 1x + 1.2(M - rf) 0.665 11.8% 23.1% a. Calculate the following statistics for each stock (Round your answers to 4 decimal places.) % Answer is complete but not entirely correct. Stock A 1.0000 0.0833 0.4907 8.8330 Stock 8 2% + 0.8(FM-rf) Stock B 2.0000 % 0.0962 0.3373 10.5000 0.481 20.6% 27.9%
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate- market's average return was 14% Performance is measured using an index model regression on exce Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns L ii. iii. Alpha Information ratio Sharpe ratio Trevnor measure Stock A 1x + 1.2(M - rf) 0.665 11.8% 23.1% a. Calculate the following statistics for each stock (Round your answers to 4 decimal places.) % Answer is complete but not entirely correct. Stock A 1.0000 0.0833 0.4907 8.8330 Stock 8 2% + 0.8(FM-rf) Stock B 2.0000 % 0.0962 0.3373 10.5000 0.481 20.6% 27.9%
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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Concept explainers
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.
Question
G.218.
Transcribed Image Text: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
Index model regression estimates
R-square
Residual standard deviation, o(e)
Standard deviation of excess returns
i
ii.
iii.
iv.
Alpha
Information ratio
Sharpe ratio
Treynor measure
Stock A
1x + 1.2(PM-rf)
a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)
0.665
11.8%
23.1%
Text
Answer is complete but not entirely correct.
Stock A
1.0000 %
0.0833
0.4907
8.8330%
Stock 8
2% + 0.8(rm- rf)
Stock B
2.0000 %
0.0962
0.3373
10.5000%
0.481
20.6%
27.9%
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.
iii. This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio.
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