Log in to Connect to find rate-of-return data over a 60-month period for Google, the T-bill rate, and the S&P 500, which we will use as the market-index portfolio.

a. Use these data and Excel's regression function to compute Google's excess return in each month as well as its alpha, beta, and residual standard deviation, σ(e), over the entire period.

b. What was the Sharpe ratio of the S&P 500 over this period?

c. What was Google's information ratio over this period?

d. If someone whose risky portfolio is currently invested in an index portfolio such as the S&P 500 wishes to take a position in Google based on the estimates from parts (a)-(c), what would be the optimal fraction of the risky portfolio to invest in Google? Use Equations 6.16 and 6.17.

In step 2, we adjust the value from Equation 6.16 for the beta of Google:

e. Based on Equation 6.18 and your answer to part (d), by how much would the Sharpe ratio of the optimal risky portfolio increase given the incremental position in Google?
The Sharpe ratio of this portfolio exceeds that of the passive portfolio M, SM, according to

Transcribed Image Text:

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