ESS. OF INVESTMENTS - ETEXT ACCESS CARD
11th Edition
ISBN: 9781265909055
Author: Bodie
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 7, Problem 24PS
Two investment advisers are comparing performance. One averaged a 19% return arid the other a 16% return. However, the beta of’ the first adviser was 15, while that of the second was I. (LO 7-2)
a. Can you tell which adviser was a better selector of individual stocks (aside from the issue of general movements in the market)?
b. If the T-bill rate were 6% and the market return during the period were 14%, which adviser would be the superior stock selector?
c. What if the T-bill rate were 3% and the market return 15%?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You were offered 2 investment opportunities, Stock M and Stock D. Your decision as to which investment to take will be based on the results of the comparative Expected Rate of Return using the following data: Stock M Return is 9.6% and Beta is 0.95 while Stock D Return is 8.7% and Beta is 1.2. A risk free return in the market, as measured by the return on government stock is 5.6%. *
pm.2
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 7%, and the
market's average return was 14%. Performance is measured using an index model regression on excess returns.
Index model regression estimates
R-square
Residual standard deviation, o(e)
Standard deviation of excess returns.
i. Alpha
ii. Information ratio
iii. Sharpe ratio
iv. Treynor measure
Stock A
a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)
%
Stock A
1% +1.2(rm rf)
%
0.635
11.3%
22.6%
Stock B
%
%
Stock B
2% +0.8( rm -rf)
b. Which stock is the best choice under the following circumstances?
0.466
20.1%
26.9%
i. This is the only risky asset to be held by the investor.
ii.
This stock will be mixed with the rest 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…
Chapter 7 Solutions
ESS. OF INVESTMENTS - ETEXT ACCESS CARD
Ch. 7 - Prob. 1PSCh. 7 - Consider the statement: “If we can identify a...Ch. 7 - Are the following true or false? Explain. (LO 7-5)...Ch. 7 - Here are data on two companies. The T-bill rate is...Ch. 7 - Characterize each company in the previous problem...Ch. 7 - What is the expected rate of return for a stock...Ch. 7 - Kaskin, Inc., stock has a beta of 1.2 and Quinn,...Ch. 7 - What must be the beta of a portfolio with E(rf)) =...Ch. 7 - The market price of a security is $40. Its...Ch. 7 - You arc a consultant to a large manufacturing...
Ch. 7 - Consider the following table, which gives a...Ch. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Two investment advisers are comparing performance....Ch. 7 - Suppose the yield on short-term government...Ch. 7 - Based on current dividend yields and expected...Ch. 7 - Consider the following data for a single index...Ch. 7 - Assume both portfolios A and B are well...Ch. 7 - Prob. 29PSCh. 7 - Prob. 30PSCh. 7 - Et
Ch. 7 - Suppose two factors are identified for the U.S....Ch. 7 - Suppose there are two independent economic...Ch. 7 - As a finance intern at Pork Products, Jennifer...Ch. 7 - Suppose the market can be described by the...Ch. 7 - Which of the following statements about the...Ch. 7 - Kay, a portfolio n1anacr at Collins Asset...Ch. 7 - Prob. 3CPCh. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CPCh. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CPCh. 7 - 12. A zero-investment, well-diversified portfolio...Ch. 7 - 13. An investor takes as large a position as...Ch. 7 - In contrast to the capital asset pricing model,...Ch. 7 - Prob. 1WMCh. 7 - Prob. 2WMCh. 7 - Prob. 3WMCh. 7 - a. Which of the stocks would you classify as...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Barry wishes to compute the beta of a stock that has a correlation of 0.64 with the market. The following data is available: Standard Deviation of Returns of Stock = 14.1%. Standard Deviation of Returns of Market = 9.44%. 1) Calculate the beta of the stock 2) If the risk free rate is estimated to be 3%, market return 9% and given the beta that you calculated in question 1, what is the expected return of the stock? 3) If the actual return next year turned out to be 10% what is the Jensen's alpha? Is Barry, the investor happy or disappointed? 4) Using data for the stock presented and/or calculated above, what is the Sharpe ratio? When is this measurement appropriate? 5) Using data for the stock presented and/or calculated above, what is Treynor measure? When is this measurement appropriate?arrow_forwardman.1arrow_forwardKaren Kay, a portfolio manager at Collins Asset Management, is using thecapital asset pricing model (CAPM) for making recommendations to her clients.Her research department has developed the information shown in the followingexhibit.Forecast Returns, Standard Deviations, and BetasForecast Return Standard Deviation BetaLow β stock (X) 14.0% 36% 0.8High β stock (Y) 17.0% 25% 1.5Market index 14.0% 15% 1.0Risk-free rate 5.0%(a) Calculate expected return and alpha for each stock.(b) Identify and justify which stock would be more appropriate for an investorwho wants to add this stock to a well-diversified equity portfolio.(c) Now consider Karen employs the “Betting Against Beta” strategy and let, , and denote the portfolio weights of the investmentin each of the asset classes (e.g. risk-free asset, low beta stock, market index,high beta stock, respectively) such that .According to its investment mandate, Collins Asset Management shouldtarget a gross leverage of 2.3. How much does she have to…arrow_forward
- Please solve step by step for clarity, thank you!arrow_forwardUse the following data to answer the question regarding the performance of Guardian Stock Fund and the market portfolio. The risk-free return during the sample period was 4%. Guardian Market Portfolio Average return 14 % 10 % Standard deviation of returns 27 % 21 % Beta 1.5 1 Residual standard deviation 4 % 0 % Calculate the information ratio measure of performance for Guardian Stock Fund. (Round your answer to 2 decimal places. Do not round intermediate calculations.)arrow_forwardSecurity A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of −0.3, and a beta coefficient of −1.5. Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is riskier? Why?arrow_forward
- Hello Can you show how to calculate the following statisticsarrow_forwardUse the following data to answer the question regarding the performance of Guardian Stock Fund and the market portfolio. The risk- free return during the sample period was 5%. Average return Standard deviation of returns Beta Residual standard deviation Guardian 14% 26% 1.2 0.60 X 4% Calculate the information ratio measure of performance for Guardian Stock Fund. (Round your answer to 2 decimal places. Do not round intermediate calculations.) Answer is complete but not entirely correct. Information ratio Market Portfolio 10% 21% 1 0%arrow_forwardUse the following data to answer the question regarding the performance of Guardian Stock Fund and the market portfolio. The risk- free return during the sample period was 5%. Average return Standard deviation of returns Beta Residual standard deviation Guardian 14% 26% Information ratio 1.2 4% Market Portfolio 10% 21% 1 0% Calculate the information ratio measure of performance for Guardian Stock Fund. (Round your answer to 2 decimal places. Do not round intermediate calculations.)arrow_forward
- Use the following data to answer the question regarding the performance of Guardian Stock Fund and the market portfolio. The risk- free return during the sample period was 5%. Average return Standard deviation of returns Beta Residual standard deviation Guardian 14% 26% 1.2 (0.80) 4% X Answer is complete but not entirely correct. Information ratio Market Portfolio Calculate the information ratio measure of performance for Guardian Stock Fund. (Round your answer to 2 decimal places. Do not round intermediate calculations.) 10% 21% 1 0%arrow_forwardPlease do not give solution in image formate thanku. Consider three investments. You are given the following means, standard deviations, and correlations for the annual return on these three investments. The means are 0.12, 0.15, and 0.20. The standard deviations are 0.20, 0.30, and 0.40. The correlation between stocks 1 and 2 is 0.65, between stocks 1 and 3 is 0.75, and between stocks 2 and 3 is 0.41. You have $10,000 to invest and can invest no more than half of your money in any single stock. Determine the minimum-variance portfolio that yields a mean annual return of at least 0.14. PLEASE USE SOLVER (SHOW EACH STEP) AND DO NOT COPY OTHERS. THANKS!arrow_forwardCurrently working on finance practice problems and need help with setting up the problem, calculating it as well as understanding what points cause it to be either overvalued or undervalued 12) consider two securities, a and b. securities a and b have a correlation coefficient of 0.65. security a has a standard deviation of 12% and security b has standard deviation of 25% calculate the covariance between the two securities a stock has a beta of the stock equalling to be 1.25. the risk free rate is 5% and the market risk premium is 6%. the estimated return for the stock is 14%. according to the CAPM you should a) sell because it is overvalued b) sell because it is undervalued c) buy because it is overvalued d) buy because it is undervalued e) short because it is undervaluedarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Investing For Beginners (Stock Market); Author: Daniel Pronk;https://www.youtube.com/watch?v=6Jkdpgc407M;License: Standard Youtube License