Consider stocks A and B below, with performance estimated according to the CAPM. The risk-free rate over the period was 6%, and the markets average return was 14%.

(a) Calculate the following statistics for each stock: 1. Information ratio 2. Sharpe ratio 3. M2 measure 4. Treynor ratio

(b) Which stock is best if it is the only risky asset held by the investor?

(c) Which stock is best if it will be mixed with the rest of the investors portfolio, which is currently composed of holding only the market portfolio?

Stock A Stock B CAPM regression estimates 1% +1.2(rm -rf) 2% +0.8(rm -rf) Residual standard deviation, o(e) 10.3% 19.1% Standard deviation of excess returns 21.6% 24.9%