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 8%, and the markets average return was 16%. 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	0.677	0.487
Residual standard deviation, (e)	12%	20.8%
Standard deviation of excess returns	23.3%	28.3%

a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.)

stock a stock b

i. alpha % %

ii. information ratio

iii.sharpe ratio

iv.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. stock a or stock b

ii. this stock will be mixed in with the rest of the investor's portfolio, currently composed solely of holdings in the market index fund. stock a or stock b

iii. this is one of the many stocks that the investor is analyzing to form an actively-managed stock portfolio. stock a or stock b