Based on current dividend yields and expected capital gains, the expected rates

Question

Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 13.1% and 16.5%, respectively. The beta of A is .8, while that of B is 1.8. The T-bill rate is currently 7%, while the expected rate of return of the S&P 500 index is 14%. The standard deviation of portfolio A is 28% annually, while that of B is 49%, and that of the index is 38%.

a. If you currently hold a market index portfolio, what would be the alpha for Portfolios A and B? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 1 decimal place.)

    Portfolio A : _____%    Portfolio B: _____%

b. If instead you could invest only in bills and one of these portfolios, calculate the sharpe measure for Portfolios A and B. (Round your answers to 2 decimal places.)

    Sharp Measure

    Portfolio A : _____% Portfolio B _____%

Explanation / Answer

Answer:a Calculation of the the alpha for Portfolios A and B:

= Rp – [Rf + (Rm – Rf) ]

A=13.1%-[7%+(14%-7%)0.8]

=0.5%

B=16.5%-[7%+(14%-7%)1.8]

=-3.1%

Answer:b Sharp Measure=rp-rf/standard deviation of securities

Portfolio A=(13.1%-7%)/28%=21.79%

Portfolio B=(16.5%-7%)/49%=19.39%

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