Problem 18.2 (a)

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 markets average return was 15%. Performance is measured using an index model regression on excess returns.

	Stock A	Stock B
Index model regression estimates	1% + 1.2(rM rf)	2% + 0.8(rM rf)
R-square	0.594	0.445
Residual standard deviation, (e)	10.6%	19.4%
Standard deviation of excess returns	21.9%	25.5%

By how much does Alpha of Stock A exceed Alpha of Stock B? (Negative values should be indicated with a minus sign. Enter your answer in percentage points. Round your answers to 4 decimal places.)

Problem 18.2 (B) By how much does Information Ratio of Stock A exceed Information Ratio of Stock B? (Negative values should be indicated with a minus sign. Round your answers to 4 decimal places.)

Problem 18.2 (c) By how much does Sharpe Ratio of Stock A exceed Sharpe Ratio of Stock B? (Negative values should be indicated with a minus sign. Round your answers to 4 decimal places.)

Problem 18.2 (D) By how much does Treynor Measure of Stock A exceed Treynor Measure of Stock B? (Negative values should be indicated with a minus sign. Enter your answer in percentage points. Round your answers to 4 decimal places.)

Problem 18.2 (e) Is Stock A the best choice in the following scenario:

This is the only risky asset to be held by the investor.

Yes

No

Problem 18.2 (f) Is Stock A the best choice in the following scenario:

This stock will be mixed with the rest of the investors portfolio, currently composed solely of holdings in the market-index fund.

Yes

No

Problem 18.2 (G) Is Stock A the best choice in the following scenario:

This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio.

Yes

No