Question: Problem 24-9 Consider the two (excess return) index-model regression results for stocks A and B . The risk-free rate over the period was 5%, and
Problem 24-9
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 5%, 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 | 0.617 | 0.457 | |||||||||
| Residual standard deviation, ?(e) | 11% | 19.8% | |||||||||
| Standard deviation of excess returns | 22.3% | 26.3% | |||||||||
a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)
ALPHA
INFORMATION RATIO
SHARPE RATIO
TREYNOR MEASURE b. Which stock is the best choice under the following circumstances?
i. this is the only risky asset to be held by the investor
ii. the stock will be mixed with the rest of the investor's portfolio, currently composed solely of holdings in the market index fund
ii. this is one of many stocks the investor is analyzing to form an actively managed stock portfolio
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