solution to practice final exam

solution to practice final exam - 1. a) The Sharpe Ratios...

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SH FT = E ( R FT ) r F FT = 0 : 19 & 0 : 05 0 : 25 = 0 : 56 SH FT = E ( R M ) r F M = 0 : 10 & 0 : 05 0 : 20 = 0 : 25 A±s conclusion. b) To compute the M measure of the Fund±s peformance, we compute the portfolio, R P , of the fund and the risk free rate that has the same standard deviation as the market, i.e. E ( R P ) = !E ( R FT ) + (1 ! ) r f p = FT Therefore, p = M implies ! = 0 : 20 = 0 : 25 = 0 : 8 . The expected return on the portfolio is E ( R P ) = 0 : 8 ± 0 : 19 + 0 : 2 ± 0 : 05 = 0 : 162 Hence, the M measure of performance is M = E ( R P ) E ( R M ) = 0 : 062 2. An equally-weighted portfolio of the two stocks is E ( R P ) = 0 : 5 R PNC + 0 : 5 R W Therefore, it±s variance is V ar ( R P ) = 0 : 5 2 V ar ( R PNC ) + 0 : 5 2 V ar ( R W ) + 2 ± 0 : 5 ± 0 : 5 ± Cov ( R PNC ;R W ) 0 : 0125 = 0 : 25 ± 0 : 36 + 0 : 25 ± 0 : 09 + 0 : 5 ± Cov ( R PNC ;R W
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solution to practice final exam - 1. a) The Sharpe Ratios...

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