Use the information below to compare the performance of your portfolio P with th
ID: 2617149 • Letter: U
Question
Use the information below to compare the performance of your portfolio P with that of the stock market: Calculate the Sharpe ratio, the Treynor ratio, the ? (Alpha), and the M2 of your portfolio P. Recall that the Alpha of your portfolio is the difference between the expected return of your portfolio (calculated using the CAPM model) and its actual return.
Portfolio (P) Stock Market (M) T-bills
Return 10% 8% 0.5%
STD (returns) 20% 12% 0
?eta 0.8 1
PLEASE SHOW WORK
Explanation / Answer
sharpe ratio
(expected return-risk free rate)/ standard deviation of stock
(10%-.5%)/20%
0.475
Treynor ratio
(expected return-risk free rate)/ standard deviation of stock
(10%-.5%)/.8
0.11875
Alpha of stock
expected return-required return
10%-6.5%
3.500%
M2 of portfolio
(sharpe ratio*standard deviation of market )+risk free rate
(.475*12%)+.5%
0.062
required return on stock
risk free rate+(market return-risk free return)*beta
.5%+(8%-.5%)*.8
6.500%
sharpe ratio
(expected return-risk free rate)/ standard deviation of stock
(10%-.5%)/20%
0.475
Treynor ratio
(expected return-risk free rate)/ standard deviation of stock
(10%-.5%)/.8
0.11875
Alpha of stock
expected return-required return
10%-6.5%
3.500%
M2 of portfolio
(sharpe ratio*standard deviation of market )+risk free rate
(.475*12%)+.5%
0.062
required return on stock
risk free rate+(market return-risk free return)*beta
.5%+(8%-.5%)*.8
6.500%
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