Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
Question
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Chapter 18, Problem 17PS
Summary Introduction

(a)

To calculate:

We have to collect the data as given in Connect and calculate each fund's excess return.

Expert Solution
Check Mark

Explanation of Solution

Excess returns are calculated as shown below. Period chosen is from 2004 to 2008.

    Total monthly returns

    Excess Returns

    Month

    Vanguard

    Value Fund

    S&P

    T-bills

    Vanguard

    Value Fund

    S&P

    Jan-04

    1.52

    -0.07

    1.35

    0.07

    1.45

    -0.14

    1.28

    Feb-04

    -0.53

    -0.99

    -1.32

    0.06

    -0.59

    -1.05

    -1.38

    Mar-04

    -2.69

    -2.46

    -1.89

    0.09

    -2.78

    -2.55

    -1.98

    Apr-04

    0.22

    2.52

    1.70

    0.08

    0.14

    2.44

    1.62

    May-04

    2.53

    1.39

    1.85

    0.06

    2.47

    1.33

    1.79

    Jun-04

    -1.93

    -7.46

    -3.22

    0.08

    -2.01

    -7.54

    -3.30

    Jul-04

    0.99

    -0.78

    0.25

    0.1

    0.89

    -0.88

    0.15

    Aug-04

    1.52

    2.49

    1.00

    0.11

    1.41

    2.38

    0.89

    Sep-04

    0.21

    1.46

    1.29

    0.11

    0.10

    1.35

    1.18

    Oct-04

    5.22

    4.66

    4.46

    0.11

    5.11

    4.55

    4.35

    Nov-04

    3.24

    3.60

    3.01

    0.15

    3.09

    3.45

    2.86

    Dec-04

    -2.36

    -3.48

    -2.24

    0.16

    -2.52

    -3.64

    -2.40

    Jan-05

    3.62

    0.79

    2.09

    0.16

    3.46

    0.63

    1.93

    Feb-05

    -2.33

    -2.86

    -1.83

    0.16

    -2.49

    -3.02

    -1.99

    Mar-05

    -2.68

    -2.41

    -1.87

    0.21

    -2.89

    -2.62

    -2.08

    Apr-05

    4.08

    7.13

    3.22

    0.21

    3.87

    6.92

    3.01

    May-05

    2.25

    0.51

    0.15

    0.24

    2.01

    0.27

    -0.09

    Jun-05

    3.55

    5.28

    3.82

    0.23

    3.32

    5.05

    3.59

    Jul-05

    -1.85

    -0.85

    -0.93

    0.24

    -2.09

    -1.09

    -1.17

    Aug-05

    0.38

    1.34

    0.80

    0.3

    0.08

    1.04

    0.50

    Sep-05

    -1.88

    0.30

    -2.36

    0.29

    -2.17

    0.01

    -2.65

    Oct-05

    2.87

    5.04

    4.39

    0.27

    2.60

    4.77

    4.12

    Nov-05

    0.93

    0.46

    -0.19

    0.31

    0.62

    0.15

    -0.50

    Dec-05

    3.41

    3.30

    2.41

    0.32

    3.09

    2.98

    2.09

    Jan-06

    0.00

    -1.82

    0.57

    0.35

    -0.35

    -2.17

    0.22

    Feb-06

    0.71

    0.34

    1.65

    0.34

    0.37

    0.00

    1.31

    Mar-06

    0.53

    -0.45

    1.26

    0.37

    0.16

    -0.82

    0.89

    Apr-06

    -3.00

    -5.84

    -3.01

    0.36

    -3.36

    -6.20

    -3.37

    May-06

    -0.27

    -1.55

    0.26

    0.43

    -0.70

    -1.98

    -0.17

    Jun-06

    1.09

    -2.36

    0.45

    0.4

    0.69

    -2.76

    0.05

    Jul-06

    2.70

    3.60

    2.18

    0.4

    2.30

    3.20

    1.78

    Aug-06

    2.63

    2.87

    2.70

    0.42

    2.21

    2.45

    2.28

    Sep-06

    2.56

    1.92

    3.16

    0.41

    2.15

    1.51

    2.75

    Oct-06

    0.75

    1.94

    1.99

    0.41

    0.34

    1.53

    1.58

    Nov-06

    2.32

    0.22

    0.77

    0.42

    1.90

    -0.20

    0.35

    Dec-06

    1.86

    2.18

    1.51

    0.4

    1.46

    1.78

    1.11

    Jan-07

    -2.30

    -1.69

    -1.96

    0.44

    -2.74

    -2.13

    -2.40

    Feb-07

    0.81

    0.89

    1.16

    0.38

    0.43

    0.51

    0.78

    Mar-07

    3.87

    2.92

    4.42

    0.43

    3.44

    2.49

    3.99

    Apr-07

    3.65

    3.37

    3.39

    0.44

    3.21

    2.93

    2.95

    May-07

    -2.02

    -1.14

    -1.46

    0.41

    -2.43

    -1.55

    -1.87

    Jun-07

    -4.74

    -0.79

    -3.13

    0.4

    -5.14

    -1.19

    -3.53

    Jul-07

    1.12

    1.11

    1.28

    0.4

    0.72

    0.71

    0.88

    Aug-07

    2.54

    4.91

    3.88

    0.42

    2.12

    4.49

    3.46

    Sep-07

    0.39

    2.19

    1.35

    0.32

    0.07

    1.87

    1.03

    Oct-07

    -5.86

    -3.90

    -3.87

    0.32

    -6.18

    -4.22

    -4.19

    Nov-07

    0.25

    0.00

    -1.13

    0.34

    -0.09

    -0.34

    -1.47

    Dec-07

    -5.39

    -10.34

    -6.04

    0.27

    -5.66

    -10.61

    -6.31

    Jan-08

    -2.67

    -2.38

    -2.58

    0.21

    -2.88

    -2.59

    -2.79

    Feb-08

    -0.89

    -0.06

    -0.90

    0.13

    -1.02

    -0.19

    -1.03

    Mar-08

    5.64

    6.32

    4.77

    0.17

    5.47

    6.15

    4.60

    Apr-08

    1.44

    3.00

    1.51

    0.17

    1.27

    2.83

    1.34

    May-08

    -7.18

    -6.25

    -8.35

    0.17

    -7.35

    -6.42

    -8.52

    Jun-08

    -1.80

    -0.40

    -0.90

    0.17

    -1.97

    -0.57

    -1.07

    Jul-08

    1.37

    0.45

    1.55

    0.15

    1.22

    0.30

    1.40

    Aug-08

    -7.50

    -11.63

    -9.42

    0.12

    -7.62

    -11.75

    -9.54

    Sep-08

    -18.16

    -15.45

    -16.52

    0.15

    -18.31

    -15.60

    -16.67

    Oct-08

    -7.16

    -7.93

    -6.96

    0.08

    -7.24

    -8.01

    -7.04

    Nov-08

    2.70

    0.57

    0.99

    0.02

    2.68

    0.55

    0.97

    Dec-08

    -10.76

    -4.49

    -8.22

    0.09

    -10.85

    -4.58

    -8.31

Conclusion

Excess returns have been shown in the spread sheet.

Summary Introduction

(b)

To calculate:

In this part of the problem we have to calculate standard deviation of each fund.

Expert Solution
Check Mark

Explanation of Solution

Standard deviation on excel can be calculated by using formula as = stdev
Then we have to choose the data accordingly to calculate standard deviation.

    Total monthly returns

    Excess Returns

    Month

    Vanguard

    Value Fund

    S&P

    T-bills

    Vanguard

    Value Fund

    S&P

    Jan-04

    1.52

    -0.07

    1.35

    0.07

    1.45

    -0.14

    1.28

    Feb-04

    -0.53

    -0.99

    -1.32

    0.06

    -0.59

    -1.05

    -1.38

    Mar-04

    -2.69

    -2.46

    -1.89

    0.09

    -2.78

    -2.55

    -1.98

    Apr-04

    0.22

    2.52

    1.70

    0.08

    0.14

    2.44

    1.62

    May-04

    2.53

    1.39

    1.85

    0.06

    2.47

    1.33

    1.79

    Jun-04

    -1.93

    -7.46

    -3.22

    0.08

    -2.01

    -7.54

    -3.30

    Jul-04

    0.99

    -0.78

    0.25

    0.1

    0.89

    -0.88

    0.15

    Aug-04

    1.52

    2.49

    1.00

    0.11

    1.41

    2.38

    0.89

    Sep-04

    0.21

    1.46

    1.29

    0.11

    0.10

    1.35

    1.18

    Oct-04

    5.22

    4.66

    4.46

    0.11

    5.11

    4.55

    4.35

    Nov-04

    3.24

    3.60

    3.01

    0.15

    3.09

    3.45

    2.86

    Dec-04

    -2.36

    -3.48

    -2.24

    0.16

    -2.52

    -3.64

    -2.40

    Jan-05

    3.62

    0.79

    2.09

    0.16

    3.46

    0.63

    1.93

    Feb-05

    -2.33

    -2.86

    -1.83

    0.16

    -2.49

    -3.02

    -1.99

    Mar-05

    -2.68

    -2.41

    -1.87

    0.21

    -2.89

    -2.62

    -2.08

    Apr-05

    4.08

    7.13

    3.22

    0.21

    3.87

    6.92

    3.01

    May-05

    2.25

    0.51

    0.15

    0.24

    2.01

    0.27

    -0.09

    Jun-05

    3.55

    5.28

    3.82

    0.23

    3.32

    5.05

    3.59

    Jul-05

    -1.85

    -0.85

    -0.93

    0.24

    -2.09

    -1.09

    -1.17

    Aug-05

    0.38

    1.34

    0.80

    0.3

    0.08

    1.04

    0.50

    Sep-05

    -1.88

    0.30

    -2.36

    0.29

    -2.17

    0.01

    -2.65

    Oct-05

    2.87

    5.04

    4.39

    0.27

    2.60

    4.77

    4.12

    Nov-05

    0.93

    0.46

    -0.19

    0.31

    0.62

    0.15

    -0.50

    Dec-05

    3.41

    3.30

    2.41

    0.32

    3.09

    2.98

    2.09

    Jan-06

    0.00

    -1.82

    0.57

    0.35

    -0.35

    -2.17

    0.22

    Feb-06

    0.71

    0.34

    1.65

    0.34

    0.37

    0.00

    1.31

    Mar-06

    0.53

    -0.45

    1.26

    0.37

    0.16

    -0.82

    0.89

    Apr-06

    -3.00

    -5.84

    -3.01

    0.36

    -3.36

    -6.20

    -3.37

    May-06

    -0.27

    -1.55

    0.26

    0.43

    -0.70

    -1.98

    -0.17

    Jun-06

    1.09

    -2.36

    0.45

    0.4

    0.69

    -2.76

    0.05

    Jul-06

    2.70

    3.60

    2.18

    0.4

    2.30

    3.20

    1.78

    Aug-06

    2.63

    2.87

    2.70

    0.42

    2.21

    2.45

    2.28

    Sep-06

    2.56

    1.92

    3.16

    0.41

    2.15

    1.51

    2.75

    Oct-06

    0.75

    1.94

    1.99

    0.41

    0.34

    1.53

    1.58

    Nov-06

    2.32

    0.22

    0.77

    0.42

    1.90

    -0.20

    0.35

    Dec-06

    1.86

    2.18

    1.51

    0.4

    1.46

    1.78

    1.11

    Jan-07

    -2.30

    -1.69

    -1.96

    0.44

    -2.74

    -2.13

    -2.40

    Feb-07

    0.81

    0.89

    1.16

    0.38

    0.43

    0.51

    0.78

    Mar-07

    3.87

    2.92

    4.42

    0.43

    3.44

    2.49

    3.99

    Apr-07

    3.65

    3.37

    3.39

    0.44

    3.21

    2.93

    2.95

    May-07

    -2.02

    -1.14

    -1.46

    0.41

    -2.43

    -1.55

    -1.87

    Jun-07

    -4.74

    -0.79

    -3.13

    0.4

    -5.14

    -1.19

    -3.53

    Jul-07

    1.12

    1.11

    1.28

    0.4

    0.72

    0.71

    0.88

    Aug-07

    2.54

    4.91

    3.88

    0.42

    2.12

    4.49

    3.46

    Sep-07

    0.39

    2.19

    1.35

    0.32

    0.07

    1.87

    1.03

    Oct-07

    -5.86

    -3.90

    -3.87

    0.32

    -6.18

    -4.22

    -4.19

    Nov-07

    0.25

    0.00

    -1.13

    0.34

    -0.09

    -0.34

    -1.47

    Dec-07

    -5.39

    -10.34

    -6.04

    0.27

    -5.66

    -10.61

    -6.31

    Jan-08

    -2.67

    -2.38

    -2.58

    0.21

    -2.88

    -2.59

    -2.79

    Feb-08

    -0.89

    -0.06

    -0.90

    0.13

    -1.02

    -0.19

    -1.03

    Mar-08

    5.64

    6.32

    4.77

    0.17

    5.47

    6.15

    4.60

    Apr-08

    1.44

    3.00

    1.51

    0.17

    1.27

    2.83

    1.34

    May-08

    -7.18

    -6.25

    -8.35

    0.17

    -7.35

    -6.42

    -8.52

    Jun-08

    -1.80

    -0.40

    -0.90

    0.17

    -1.97

    -0.57

    -1.07

    Jul-08

    1.37

    0.45

    1.55

    0.15

    1.22

    0.30

    1.40

    Aug-08

    -7.50

    -11.63

    -9.42

    0.12

    -7.62

    -11.75

    -9.54

    Sep-08

    -18.16

    -15.45

    -16.52

    0.15

    -18.31

    -15.60

    -16.67

    Oct-08

    -7.16

    -7.93

    -6.96

    0.08

    -7.24

    -8.01

    -7.04

    Nov-08

    2.70

    0.57

    0.99

    0.02

    2.68

    0.55

    0.97

    Dec-08

    -10.76

    -4.49

    -8.22

    0.09

    -10.85

    -4.58

    -8.31

    Average

    -0.59

    -0.60

    -0.55

    Standard Deviation

    4.05

    4.21

    3.81

Conclusion

Standard deviation for the two funds is 4.05 and 4.21.

Summary Introduction

(d)

To Calculate:

In this question we have to calculate Sharpe, Jensen and Treynor ratio for each fund.

Expert Solution
Check Mark

Explanation of Solution

All these ratios are calculated as:

Sharpe ratio=
Excess Return / standard devationEssentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate), Chapter 18, Problem 17PS , additional homework tip 1

Treynor=Excess return / BetaEssentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate), Chapter 18, Problem 17PS , additional homework tip 2
Jensen=αP = E(rP) − {rf + βP [E(rM) − rf]}

    Total monthly returns

    Excess Returns

    Month

    Vanguard

    Value Fund

    S&P

    T-bills

    Vanguard

    Value Fund

    S&P

    Jan-04

    1.52

    -0.07

    1.35

    0.07

    1.45

    -0.14

    1.28

    Feb-04

    -0.53

    -0.99

    -1.32

    0.06

    -0.59

    -1.05

    -1.38

    Mar-04

    -2.69

    -2.46

    -1.89

    0.09

    -2.78

    -2.55

    -1.98

    Apr-04

    0.22

    2.52

    1.70

    0.08

    0.14

    2.44

    1.62

    May-04

    2.53

    1.39

    1.85

    0.06

    2.47

    1.33

    1.79

    Jun-04

    -1.93

    -7.46

    -3.22

    0.08

    -2.01

    -7.54

    -3.30

    Jul-04

    0.99

    -0.78

    0.25

    0.1

    0.89

    -0.88

    0.15

    Aug-04

    1.52

    2.49

    1.00

    0.11

    1.41

    2.38

    0.89

    Sep-04

    0.21

    1.46

    1.29

    0.11

    0.10

    1.35

    1.18

    Oct-04

    5.22

    4.66

    4.46

    0.11

    5.11

    4.55

    4.35

    Nov-04

    3.24

    3.60

    3.01

    0.15

    3.09

    3.45

    2.86

    Dec-04

    -2.36

    -3.48

    -2.24

    0.16

    -2.52

    -3.64

    -2.40

    Jan-05

    3.62

    0.79

    2.09

    0.16

    3.46

    0.63

    1.93

    Feb-05

    -2.33

    -2.86

    -1.83

    0.16

    -2.49

    -3.02

    -1.99

    Mar-05

    -2.68

    -2.41

    -1.87

    0.21

    -2.89

    -2.62

    -2.08

    Apr-05

    4.08

    7.13

    3.22

    0.21

    3.87

    6.92

    3.01

    May-05

    2.25

    0.51

    0.15

    0.24

    2.01

    0.27

    -0.09

    Jun-05

    3.55

    5.28

    3.82

    0.23

    3.32

    5.05

    3.59

    Jul-05

    -1.85

    -0.85

    -0.93

    0.24

    -2.09

    -1.09

    -1.17

    Aug-05

    0.38

    1.34

    0.80

    0.3

    0.08

    1.04

    0.50

    Sep-05

    -1.88

    0.30

    -2.36

    0.29

    -2.17

    0.01

    -2.65

    Oct-05

    2.87

    5.04

    4.39

    0.27

    2.60

    4.77

    4.12

    Nov-05

    0.93

    0.46

    -0.19

    0.31

    0.62

    0.15

    -0.50

    Dec-05

    3.41

    3.30

    2.41

    0.32

    3.09

    2.98

    2.09

    Jan-06

    0.00

    -1.82

    0.57

    0.35

    -0.35

    -2.17

    0.22

    Feb-06

    0.71

    0.34

    1.65

    0.34

    0.37

    0.00

    1.31

    Mar-06

    0.53

    -0.45

    1.26

    0.37

    0.16

    -0.82

    0.89

    Apr-06

    -3.00

    -5.84

    -3.01

    0.36

    -3.36

    -6.20

    -3.37

    May-06

    -0.27

    -1.55

    0.26

    0.43

    -0.70

    -1.98

    -0.17

    Jun-06

    1.09

    -2.36

    0.45

    0.4

    0.69

    -2.76

    0.05

    Jul-06

    2.70

    3.60

    2.18

    0.4

    2.30

    3.20

    1.78

    Aug-06

    2.63

    2.87

    2.70

    0.42

    2.21

    2.45

    2.28

    Sep-06

    2.56

    1.92

    3.16

    0.41

    2.15

    1.51

    2.75

    Oct-06

    0.75

    1.94

    1.99

    0.41

    0.34

    1.53

    1.58

    Nov-06

    2.32

    0.22

    0.77

    0.42

    1.90

    -0.20

    0.35

    Dec-06

    1.86

    2.18

    1.51

    0.4

    1.46

    1.78

    1.11

    Jan-07

    -2.30

    -1.69

    -1.96

    0.44

    -2.74

    -2.13

    -2.40

    Feb-07

    0.81

    0.89

    1.16

    0.38

    0.43

    0.51

    0.78

    Mar-07

    3.87

    2.92

    4.42

    0.43

    3.44

    2.49

    3.99

    Apr-07

    3.65

    3.37

    3.39

    0.44

    3.21

    2.93

    2.95

    May-07

    -2.02

    -1.14

    -1.46

    0.41

    -2.43

    -1.55

    -1.87

    Jun-07

    -4.74

    -0.79

    -3.13

    0.4

    -5.14

    -1.19

    -3.53

    Jul-07

    1.12

    1.11

    1.28

    0.4

    0.72

    0.71

    0.88

    Aug-07

    2.54

    4.91

    3.88

    0.42

    2.12

    4.49

    3.46

    Sep-07

    0.39

    2.19

    1.35

    0.32

    0.07

    1.87

    1.03

    Oct-07

    -5.86

    -3.90

    -3.87

    0.32

    -6.18

    -4.22

    -4.19

    Nov-07

    0.25

    0.00

    -1.13

    0.34

    -0.09

    -0.34

    -1.47

    Dec-07

    -5.39

    -10.34

    -6.04

    0.27

    -5.66

    -10.61

    -6.31

    Jan-08

    -2.67

    -2.38

    -2.58

    0.21

    -2.88

    -2.59

    -2.79

    Feb-08

    -0.89

    -0.06

    -0.90

    0.13

    -1.02

    -0.19

    -1.03

    Mar-08

    5.64

    6.32

    4.77

    0.17

    5.47

    6.15

    4.60

    Apr-08

    1.44

    3.00

    1.51

    0.17

    1.27

    2.83

    1.34

    May-08

    -7.18

    -6.25

    -8.35

    0.17

    -7.35

    -6.42

    -8.52

    Jun-08

    -1.80

    -0.40

    -0.90

    0.17

    -1.97

    -0.57

    -1.07

    Jul-08

    1.37

    0.45

    1.55

    0.15

    1.22

    0.30

    1.40

    Aug-08

    -7.50

    -11.63

    -9.42

    0.12

    -7.62

    -11.75

    -9.54

    Sep-08

    -18.16

    -15.45

    -16.52

    0.15

    -18.31

    -15.60

    -16.67

    Oct-08

    -7.16

    -7.93

    -6.96

    0.08

    -7.24

    -8.01

    -7.04

    Nov-08

    2.70

    0.57

    0.99

    0.02

    2.68

    0.55

    0.97

    Dec-08

    -10.76

    -4.49

    -8.22

    0.09

    -10.85

    -4.58

    -8.31

    Average

    -0.59

    -0.60

    -0.55

    Sharpe ratio

    -0.15

    -0.14

    -0.14

    Alpha

    -0.03

    -0.04

    0.00

    Treynor

    -0.57

    -0.58

    -0.55

Conclusion
    Alpha-0.03-0.040.00
    Treynor-0.57-0.58-0.55

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Chapter 18 Solutions

Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)

Ch. 18 - Prob. 1PSCh. 18 - Prob. 2PSCh. 18 - Prob. 3PSCh. 18 - 4. Two portfolio managers use different procedures...Ch. 18 - Prob. 5PSCh. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Conventional wisdom says that one should measure a...Ch. 18 - Prob. 9PSCh. 18 - Prob. 10PS
Ch. 18 - Bill Smith is evaluating the performance of four...Ch. 18 - Prob. 12PSCh. 18 - Prob. 13PSCh. 18 - Prob. 14PSCh. 18 - Prob. 15PSCh. 18 - Prob. 16PSCh. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 19PSCh. 18 - Prob. 1CPCh. 18 - Prob. 2CPCh. 18 - Prob. 3CPCh. 18 - Prob. 4CPCh. 18 - Prob. 1WMCh. 18 - Prob. 2WMCh. 18 - Prob. 3WMCh. 18 - Prob. 4WM
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