: Consider two (excess return) index-model regression results for stocks A and B. The risk-free rate over the year was 6%, and the markets average return was 14%. Performance is measures using an index model regression on excess returns.

Measure Stock A Stock B

Index model regression estimates 1% + 1.2 * (r_M-r_RF) 2% + 0.8* (r_M-r_RF)

R-square 0.576 0.436

Residual standard deviation, (e) 10.3% 19.1%

Standard deviation of excess returns 21.6% 24.9%

Part a: calculate the following statistics for each stock:

1. Alpha
2. Information ratio
3. Sharpe ratio
4. Treynor ratio

Part b: Which stock is the best choice under the following circumstances?

1. This is the only risky asset to be held by the investor
2. This stock will be mixed with the rest of the investors portfolio, currently composed solely of holdings in the market-index fund.
3. This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio.