Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate...
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Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 6%, and the market's average return was 13%. Performance is measured using an index model regression on excess returns. Stock A Index model regression estimates R-square 1% +1.2(rm rf) Stock B 2% +0.8(rm rf) 0.588 0.442 Residual standard deviation, (e) Standard deviation of excess returns 10.5% 21.8% 19.3% 25.3% a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.) Stock A Stock B % % i. Alpha ii. Information ratio iii. Sharpe ratio iv. Treynor measure % % b. Which stock is the best choice under the following circumstances? Answer is complete and correct. i. This is the only risky asset to be held by the investor. Stock A ii. This stock will be mixed with the rest of the investor's portfolio, currently composed solely of holdings in the market-index fund. Stock B This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio. Stock B Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 6%, and the market's average return was 13%. Performance is measured using an index model regression on excess returns. Stock A Index model regression estimates R-square 1% +1.2(rm rf) Stock B 2% +0.8(rm rf) 0.588 0.442 Residual standard deviation, (e) Standard deviation of excess returns 10.5% 21.8% 19.3% 25.3% a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.) Stock A Stock B % % i. Alpha ii. Information ratio iii. Sharpe ratio iv. Treynor measure % % b. Which stock is the best choice under the following circumstances? Answer is complete and correct. i. This is the only risky asset to be held by the investor. Stock A ii. This stock will be mixed with the rest of the investor's portfolio, currently composed solely of holdings in the market-index fund. Stock B This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio. Stock B
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