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 equallyweighted 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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 Spring '08
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 Capital Asset Pricing Model, Probability theory, Modern portfolio theory, rp, sharpe ratio, rcall

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