EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 24, Problem 6CP
A
Summary Introduction
To calculate: The sharpe measures and treynor ratio for portfolio X and S&P 500. And explain the X portfolio performance using treynor measure and the sharpe ratio.
Introduction: Sharpe ratio tells about the risk premium with respect to the total risk of the market. Treynor ratio is defined as the risk premium and risk premium is difference of risk rate and return.
A
Expert Solution
Answer to Problem 6CP
The value of Sharpe ratio is 0.222 and 0.462 and Treynor ratio is 6.67 and 6.
Explanation of Solution
The Sharpe ratio of the X portfolio and S&P 500 is calculated below,
Treynor ratio for X portfolio and S&P 500 is calculated below,
B
Summary Introduction
To explain: The Risk management in both portfolios and the reason for the result when using treynor measure versus the sharpe ratio.
Introduction: The risk taking of any portfolio is decided by the value of beta and standard deviation. For low value of beta means low risk in the market.
B
Expert Solution
Answer to Problem 6CP
Portfolio X has low risk as the low beta value.
Explanation of Solution
The risk of portfolios is decided by the value of beta and standard deviation. As from the value portfolio ‘X’ has low beta value. Hence it has lower risk in market. On the other hand the standard deviation value is high for portfolio ‘X’, this means it has high total risk in the market.
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Students have asked these similar questions
An analyst wants to evaluate Portfolio X, consisting entirely of U.S. common stocks, using both the Treynor and Sharpe measures of portfolio performance. The following table
provides the average annual rate of return for Portfolio X, the market portfolio (as measured by the Standard and Poor's 500 Index), and U.S. Treasury bills (T-bills) during the
past eight years.
Annual Average Standard Deviation
Rate of Return
of Return
Beta
Portfolio X
11%
18%
0.40
S&P 500
13
14
1.00
T-bills
6
n/a
n/a
n/a = not applicable
a. Calculate both the Treynor measure and the Sharpe measure for both Portfolio X and the S&P 500. Round your answers for the Treynor measure to one decimal place
and for the Sharpe measure to three decimal places.
Treynor measure
Sharpe measure
Portfolio X
S&P 500
%
Briefly explain whether Portfolio X underperformed, equaled, or outperformed the S&P 500 on a risk-adjusted basis using both the Treynor measure and the Sharpe
measure.
Based on the Treynor measure Portfolio…
2. An analyst wants to evaluate Portfolio X, consisting entirely of U.S. common stocks,
using both the Treynor and Sharpe measures of portfolio performance. The following
table provides the average annual rate of return for Portfolio X, the market portfolio (as
measured by the Standard & Poor's 500 Index), and U.S. Treasury bills (T-bills) during
the past eight years.
Annual Average
Standard Deviation
Rate of Return
of Return
Beta
Portfolio X
10%
18%
0.60
S&P 500
13
1.00
12
n/a
T-bills
n/a
n/a = not applicable
a. Calculate both the Treynor measure and the Sharpe measure for both Portfolio X and
the S&P 500. Briefly explain whether Portfolio X underperformed, equaled, or outper-
formed the S&P 500 on a risk-adjusted basis using both the Treynor measure and the
Sharpe measure.
b. Based on the performance of Portfolio X relative to the S&P 500 calculated in part (a),
briefly explain the reason for the conflicting results when using the Treynor measure
versus the Sharpe measure.
Consider the following historical performance data for two different portfolios, the
Standard and Poor's 500, and the 90-day T-bill presented below. What is the
Fama diversification measure for the Globex Fund? Assume the T-bill rate as the risk-
free rate and the S&P return as the market average return.
Use at least four decimal places in your calculations, but report your answer in
percentage terms rounded to two decimal places. (Ex..12345 should be entered
as "12.35")
Investment
Vehicle
Globex Fund
World Fund
S&P500
90-day T-bill
Answer:
Average
Rate of
Return%
25.2
13.92
15.52
7.10
Standard
Deviation
21.33
14
12.8
0.3
Beta
1.05
0.95
R²
0.756
0.741
Chapter 24 Solutions
EBK INVESTMENTS
Ch. 24 - Prob. 1PSCh. 24 - Prob. 2PSCh. 24 - Prob. 3PSCh. 24 - Prob. 4PSCh. 24 - Prob. 5PSCh. 24 - Prob. 6PSCh. 24 - Prob. 7PSCh. 24 - Prob. 8PSCh. 24 - Prob. 9PSCh. 24 - Prob. 10PS
Ch. 24 - Prob. 11PSCh. 24 - Prob. 12PSCh. 24 - Prob. 13PSCh. 24 - Prob. 14PSCh. 24 - Prob. 15PSCh. 24 - Prob. 16PSCh. 24 - Prob. 17PSCh. 24 - Prob. 18PSCh. 24 - Prob. 19PSCh. 24 - Prob. 20PSCh. 24 - Prob. 21PSCh. 24 - Prob. 22PSCh. 24 - Prob. 1CPCh. 24 - Prob. 2CPCh. 24 - Prob. 3CPCh. 24 - Prob. 4CPCh. 24 - Prob. 5CPCh. 24 - Prob. 6CPCh. 24 - Prob. 7CPCh. 24 - Prob. 8CPCh. 24 - Prob. 9CPCh. 24 - Prob. 10CPCh. 24 - Prob. 11CPCh. 24 - Prob. 12CPCh. 24 - Prob. 13CPCh. 24 - Prob. 14CP
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