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KIC000041

# KIC000041 - r-I~_>~.~"= 1\9 ~ 0< o-e 0t~ ~ 8gn t ~-=...

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Finance 320 Problem Set #5 1. Consider thetwo(excess return) index model regression results forStocks AandB. Therisk- free rate over the period was 6%, and the market's average return was 14%. The standard deviation of the market return is 15.4%. Performance is measured using an index model regression onexcess returns. Stock A StockB Index model regression estimates R 2 Residual standard deviation, O"e Standard deviation ofexcess returns 1 % + 1.2(RM - Rr) 0.926 5.2% 19.3% 2%+0.8(R M - Rr) 0.245 21.6% 24.9% Calculate thefollowing statistics foreach stock: a. Alpha b. Appraisal ratio c. Sharpe ratio <I. Treynor ratio - M 2 e., I Which stock isthebest choice under thefollowing circumstances? a. This istheonlyrisky assettobeheld bytheinvestor. b. This stock will be mixed with the rest of the investor's portfolio, currently composed solely ofholdings inthemarket index fund. c. This isone of many stocks that the investor isanalyzing to form an actively managed stock portfolio. 2. A global equity manager is assigned to select stocks from a universe of large stocks
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