An analyst who believes in the Treynor - Black Model has identified one active stock, stock A,
Question:
An analyst who believes in the Treynor - Black Model has identified one active stock, stock A,
which he/she wants to combine with the passive Market Index M to form their firm's optimal risky
portfolio. A regression of the excess returns of stock A on the excess returns of the market index M,
have discovered that stock A's alpha is 4%, its beta is 2.0, and the residual standard deviation of the
error term for stock A is 18%. The standard deviation for the market index M is 14%, the expected
return on M is 11%, the risk-free rate of return is 3%, and the expected return on stock A is 22%.
What is active stock A's information ratio? Please calculate the information ratio as a decimal not a percentage.What is the Sharpe Ratio for the optimal risky portfolio formed by the optimal combination of
the active stock A with the passive market index M? Note that the Sharpe Ratio is usually expressed as a decimal. What percentage of the optimal risky portfolio formed with A and M should be invested in
active stock A? Please calculate the weight as a percentage of the portfolio. Do not enter % in the answer box.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill