GoGo Fund has an average return of 13.4%, standard deviation of 5.67%, alpha of 3.45%, beta of 1.12, and residual standard deviation of 2.26%. If the average risk-free rate is 2.38%, GoGo's information ratio is closest to:

The following information relates to Questions 31 to 36:

Sabrina Ford is the director of the UTSC investment firm. She has asked Dan Rogers, head of UTSC research team, to develop a two-factor Arbitrage Pricing Theory Model. After months of hard work, Dan identifies two independent factors, F1 and F2, and three well-diversified portfolios that are on the Security Market Line: Beta on F1

Beta on F2

Expected Return

Standard Deviation

Portfolio A

1.2

0.8

12.20%

12.50%

Portfolio B

0.8

1.1

12.20%

12.73%

Portfolio C

1.0

1.7

16.70%

18.79%

Sabrina wants to use the model to evaluate the investment decision of the firm's newly added funds. However, one of fund managers, Paul Telus, raises his concerns and makes the following comments:

Comment 1: The Capital Asset Pricing Model is a better model to use as it does not require as many assumptions as the APT.

Comment 2: CAPM has a Security Market Line that is a linear line showing the relationship between securities' expected return and their market risk. It is simple and easy to apply. ATP does not have a Security Markey Line as it has multiple factors and not the Market portfolio.

Comment 3: CAPM applies to all securities and portfolios but this is not true for some securities in APT.

Dan does not respond to all of Paul's comments. However, he argues that APT does have a Security Market Line:

()=+,11+,22

where is the factor risk premium.

Sabrina is not quite sure about it and asks Dan to evaluate Asset D to prove his model to Paul. Asset D has a beta on F1 of 0.7, a beta on F2 of 1.3, and a standard deviation of 17.33%.

Question 1: Is Paul's comment 1 most likely to be correct?

A) Yes.

B) No, CAPM requires the same number of assumptions as APT.

C) No, CAPM requires more assumptions than APT.

Question 2: Is Paul's comment 2 most likely to be correct?

A) Yes.

B) No, there is a Security Market Line for APT.

C) No, the Security Market Line of CAPM shows the relationship between securities' expected return and their total risk.

Question 3: Is Paul's comment 3 most likely to be correct?

A) Yes.

B) No, CAPM does not apply to some securities as well.

C) No, APT also applies to all securities and portfolios.

Question 4: According to the Security Market Line suggested by Dan, the risk premium of factor 1 is closest to:

Question 5. According to the Security Market Line suggested by Dan, the standard deviation of factor 2 is closest to:

Question 6: Asset D's nonsystematic standard deviation is closest to: