Q5. You are assigned a task to compare portfolios W, X, Y and Z. During the most recent 4-year period, the average annual rate of return on an aggregate market portfolio was 12%, and the average nominal rate of return on government T-bills was 5%. You also learned that the standard deviation of an annual rate of return for the market portfolio over the past 4 years was 5%. In order to compare the portfolios' performances, you need to compute each portfolio's risk-adjusted return and compare them against the market's risk-adjusted return. Portfolio Return Beta Standard Deviation W 0.17 1.3 X 0.11 1.0 Y 0.22 1.6 Z 0.15 0.9 0.04 0.05 0.10 0.05 Using the additional information provided in the table, answer the following questions. Compute the Sharpe measure for each portfolio and the market portfolio. Compute the Treynor measure for each portfolio and the market portfolio. Rank the portfolios using Sharpe and Treynor measures and explain the cause for any differences you find in the rankings. a. b. C. d. Compute the Jensen's alpha for Portfolio Y.
Q5. You are assigned a task to compare portfolios W, X, Y and Z. During the most recent 4-year period, the average annual rate of return on an aggregate market portfolio was 12%, and the average nominal rate of return on government T-bills was 5%. You also learned that the standard deviation of an annual rate of return for the market portfolio over the past 4 years was 5%. In order to compare the portfolios' performances, you need to compute each portfolio's risk-adjusted return and compare them against the market's risk-adjusted return. Portfolio Return Beta Standard Deviation W 0.17 1.3 X 0.11 1.0 Y 0.22 1.6 Z 0.15 0.9 0.04 0.05 0.10 0.05 Using the additional information provided in the table, answer the following questions. Compute the Sharpe measure for each portfolio and the market portfolio. Compute the Treynor measure for each portfolio and the market portfolio. Rank the portfolios using Sharpe and Treynor measures and explain the cause for any differences you find in the rankings. a. b. C. d. Compute the Jensen's alpha for Portfolio Y.
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.
Question
Transcribed Image Text:Q5. You are assigned a task to compare portfolios W, X, Y and Z. During the most recent 4-year period, the average
annual rate of return on an aggregate market portfolio was 12%, and the average nominal rate of return on
government T-bills was 5%. You also learned that the standard deviation of an annual rate of return for the market
portfolio over the past 4 years was 5%. In order to compare the portfolios' performances, you need to compute each
portfolio's risk-adjusted return and compare them against the market's risk-adjusted return.
Portfolio
Return
Standard Deviation
W
0.17
X
0.11
Y
0.22
Z
0.15
0.04
0.05
0.10
0.05
Using the additional information provided in the table, answer the following questions.
Compute the Sharpe measure for each portfolio and the market portfolio.
Compute the Treynor measure for each portfolio and the market portfolio.
Rank the portfolios using Sharpe and Treynor measures and explain the cause for any differences you find in the
rankings.
a.
b.
C.
Beta
1.3
1.0
1.6
0.9
d.
Compute the Jensen's alpha for Portfolio Y.
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