calculate the following M-squared measure T-squared measure, and Appraisal ratio (information ratio) Fund Average return Standard Deviation Beta coefficient Unsystematic Risk A 0.240 0.220 0.800 0.017 B 0.200 0.170 0.900 0.450 C 0.290 0.380 1.200 0.074 D 0.260 0.290 1.100 0.026 E 0.180 0.400 0.900 0.121 F 0.320 0.460 1.100 0.153 G 0.250 0.190 0.700 0.120 Market 0.220 0.180 1.000 0.000 Risk free return 0.050 0.000 Out of the performance measures you calculated in part a., which one would you use under each of the following circumstances: i. You want to select one of the funds as your risky portfolio. ii. You want to select one of the funds to be mixed with the rest of your portfolio, currently composed solely of holdings in the market-index fund. iii. You want to select one of the funds to form an actively managed stock portfolio
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
calculate the following
M-squared measure
T-squared measure, and
Appraisal ratio (information ratio)
| Fund | Average return | Standard Deviation | Beta coefficient | Unsystematic Risk |
| A | 0.240 | 0.220 | 0.800 | 0.017 |
| B | 0.200 | 0.170 | 0.900 | 0.450 |
| C | 0.290 | 0.380 | 1.200 | 0.074 |
| D | 0.260 | 0.290 | 1.100 | 0.026 |
| E | 0.180 | 0.400 | 0.900 | 0.121 |
| F | 0.320 | 0.460 | 1.100 | 0.153 |
| G | 0.250 | 0.190 | 0.700 | 0.120 |
| Market | 0.220 | 0.180 | 1.000 | 0.000 |
| Risk free return | 0.050 | 0.000 |
Out of the performance measures you calculated in part a., which one would you use under
each of the following circumstances:
i. You want to select one of the funds as your risky portfolio.
ii. You want to select one of the funds to be mixed with the rest of your portfolio,
currently composed solely of holdings in the market-index fund.
iii. You want to select one of the funds to form an actively managed stock portfolio
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