EBK ESSENTIALS OF INVESTMENTS
10th Edition
ISBN: 8220102800267
Author: Bodie
Publisher: YUZU
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Question
Chapter 18, Problem 1PS
Summary Introduction
(A)
Case Summary:
The finance committee of an endowment fund decides to shift part of its investment in an index fund to a portfolio which is professionally managed. Upon investigation by a committee member, he proposes to choose a portfolio which has greater alpha value.
Characters in the case: A Committee member
Adequate Information: Alpha Value which is a performance ratio to help an investor evaluate risk-adjusted performance of a portfolio.
To determine if the proposed portfolio with greater alpha value should be chosen.
Expert Solution
Explanation of Solution
Given Information:
The committee member proposes to choose an investment portfolio which has greater alpha value. Only this ratio will not help to determine the performance of the portfolio. Alpha along with Sharpe ratio is often used to rank the performance an investment portfolio.
Alpha is a ratio which reflects the performance of an investment relative to benchmark index which means that a positive alpha shows that the fund has beaten benchmark by 1% and so higher the alpha, better the fund. But alpha is just a number and expressed in percentage so alpha along with Sharpe ratio is used to determine the performance of the investment on risk-adjusted basis. Sharpe ratio helps to determine the real return on each unit of portfolio. Higher the ratio, better the
Conclusion
Thus to conclude, a positive alpha alone cannot determine the performance of the investment portfolio to give the Sharpe measure higher than the benchmark.
Summary Introduction
(B)
To determine if positive alpha shows the performance of the portfolio is inferior.
Introduction: Alpha is a performance measure of an investment relative to benchmark index which means a positive alpha has beaten the benchmark index and so better the fund while Sharpe ratio along with alpha helps to determine the real performance of the portfolio.
Expert Solution
Answer to Problem 1PS
A positive alpha can be associated with inferior performance of a portfolio if the Sharpe ratio has decreased.
Explanation of Solution
A positive alpha shows the performance of the portfolio relative to its benchmark while the Sharpe ratio shows the real return on each unit of investment. Thus it might be that the alpha is positive but Sharpe ratio has declined. This will in turn reflect inferior performance of the investment.
Conclusion
Therefore, yes it is true that a positive alpha may reflect inferior performance of the investment
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Students have asked these similar questions
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comment please i will write values.
Assume that the following statements of financial position are stated and a book value.
Alpha Corporation
Current Assets
$15,000
Current Liabilities
$5,400
Net Fixed Assets
39,000
Long-Term Debt
10,100
Equity
38,500
$54,000
$54,000
Beta Corporation
Current Assets
$3,600
Current Liabilities
$1,400
Net Fixed Assets
6,700
Long-Term Debt
2,100
Equity
6,800
$10,300
$10,300
Suppose the fair market value of Beta’s fixed assets is $9,500 rather than the $6,700 book value shown. Alpha pays $17,300 for Beta and raises the needed funds through an issue of long-term debt. Construct the post-merger statement of financial position now, assuming that the purchase method of accounting is used.
The shareholders of Barley Corporation have voted in favor of a buyout offer from Wheat Corporation. Information about each firm is given here:
Barley
Wheat
Price/earnings ratio
13.5
21
Shares outstanding
90,000
210,000
Earnings
$180,000
$810,000
Barley shareholders will receive one share of Wheat stock for every three shares they hold of Barley.
Required
What will the EPS of Wheat be after the merger? What will be the P/E ratio if the NPV of the acquisition is 0?
What must Wheat feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover?
Chapter 18 Solutions
EBK ESSENTIALS OF INVESTMENTS
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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