Data

A B

Portfolio Returns 10% 6%

Standard Deviation 18% 8%

Beta 1.2 0.8

Market Return 8% 8%

Standard Deviation 15% 15% Risk Free Return 3% 3%

One of these new portfolios could be added to an existing portfolio, which has a beta of 0.9. The market is expected to improve over the next year.

Questions:

1. Which portfolio has the best alpha? Show why.
2. Which is the most efficient diversified portfolio? Why?
3. Which portfolio would you add to the existing portfolio? Why?

SECTION 4B Efficiency measures

Data:

Portfolio Return 13%

Portfolio Standard Deviation 15%

Alpha Standard Deviation 9%

Beta 0.8

Market Return 7%

Market Standard Deviation 9%

Beta 1.0

Risk Free Rate 3%

Calculate for the Portfolio:

4. Sharpe Ratio
5. Treynor Ratio