EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 13, Problem 1PS
Summary Introduction
To compute: Beta and construct a tabulated summary.
Introduction: The model that shows the relation between systematic risk and expected
Expert Solution & Answer
Explanation of Solution
Security market line: SML refers to a line that represents CAPM (capital asset pricing model), which further shows the level of systematic, or market, risks for various securities against the expected return of the market at a stated point of time.
Regression can be applied to excess return to evaluate beta for each portfolio. It has been shown below:
Beta of Stock A: -0.4707
Beta of Stock B: 0.5945
Beta of Stock C: 0.4172
Beta of Stock D: 1.3799
Beta of Stock E: 0.9018
Beta of Stock F: 1.7769
Beta of Stock G: 0.6638
Beta of Stock H: 1.9119
Beta of Stock I: 2.0819
Tabulated summary has been constructed below:
| Stock | Beta |
| A | -0.47072 |
| B | 0.59447 |
| C | 0.41722 |
| D | 1.37988 |
| E | 0.90179 |
| F | 1.77688 |
| G | 0.66377 |
| H | 1.91194 |
| I | 2.08192 |
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Answer the question:
Given the following historical returns, calculate the average return and the standard deviation:
Year
Return
1
14%
2
10%
3
15%
4
11%
a. Using the data in the table below alculate the following performance measures.i. Sharpe ratioii. Treynor measureiii. Jensen’s alphaiv. M-squared measurev. T-squared measure, andvi. 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
b. Out of the performance measures you calculated in part a., which one would you use undereach 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
Suppose the average return on Asset A is 6.6 percent and the standard deviation is 8.6 percent and the average return and standard deviation on Asset B are 3.8 percent and 3.2 percent, respectively. Further assume that the returns are normally distributed. Use the NORMDIST function in Excel® to answer the following questions.
a.
What is the probability that in any given year, the return on Asset A will be greater than 11 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
b.
What is the probability that in any given year, the return on Asset B will be greater than 11 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
c-1.
In a particular year, the return on Asset A was −4.25 percent. How likely is it that such a low return will recur at some point in the future? (Do…
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