Chapter 18, Problem 9PS

Consider the two (excess return) index~m0del regression results for stocks A and B. The risk-free rate over the period was $\text{6}\%$ , and the market’s average return was $\text{14}\%$ . Performance is measured using an index model regression en excess returns.

	Stock A	Stock B
Index model regression estimates	$1\%÷1.2(r_m-r_t)$	$2\%÷0.8(r_m-r_t)$
R-square	$0.\text{576}$	$0.\text{436}$
Residual standard deviation. $\sigma (e)$	$\text{1}0.\text{3}\%$	$\text{19}.\text{1}\%$
Standard deviation of excess returns	$\text{21}.\text{6}\%$	$\text{24}.\text{9}\%$

a. Calculate the following statistics for each stock:
i. Alpha
ii. Information ratio
iii. Sharpe ratio
iv. Treynor’s measure
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 zest 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. $\left(\text{L}0\text{ 18}-\text{2}\right)$