Consider the following information: Portfolio 1 Portfolio 2 Portfolio 3 Market Mean return (%) 16 11...

  

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Consider the following information: Portfolio 1 Portfolio 2 Portfolio 3 Market Mean return (%) 16 11 15.5 15 Unsystematic 6 8 risk (%) Beta 1.2 0.85 0.98 The standard deviation of the market portfolio is 12% and the risk-free rate is 5%. (a) Calculate the Sharpe ratio and Treynor ratio for each portfolio and compare their performance to the benchmark. [30 marks] (b) Why do some investors prefer to use Treynor ratio instead of Sharpe ratio? Use relevant graphs to illustrate the meaning of the two portfolio evaluation metrics. [20 marks] (c) Determine the differential return (with standard deviation as a measure of risk) and Jensen's alpha and comment. [30 marks] (d) Illustrate the meaning of Jensen's alpha by using relevant graphs and comments. Consider the following information: Portfolio 1 Portfolio 2 Portfolio 3 Market Mean return (%) 16 11 15.5 15 Unsystematic 6 8 risk (%) Beta 1.2 0.85 0.98 The standard deviation of the market portfolio is 12% and the risk-free rate is 5%. (a) Calculate the Sharpe ratio and Treynor ratio for each portfolio and compare their performance to the benchmark. [30 marks] (b) Why do some investors prefer to use Treynor ratio instead of Sharpe ratio? Use relevant graphs to illustrate the meaning of the two portfolio evaluation metrics. [20 marks] (c) Determine the differential return (with standard deviation as a measure of risk) and Jensen's alpha and comment. [30 marks] (d) Illustrate the meaning of Jensen's alpha by using relevant graphs and comments.