You currently hold a portfolio that has SPY, MSFT, AAPL, and WFC in it. You are

Question

You currently hold a portfolio that has SPY, MSFT, AAPL, and WFC in it. You are considering adding BA stock to it. Table below summarizes historical data analysis for (1) SPY,                 (2) Portfolio of (SPY, MSFT, AAPL, and WFC), (3) BA stock, and (4) New Portfolio that is based on the old portfolio with BA stock added to it.

Use this table to answer all the questions:

1. Based on Treynor Index, which one has the best performance?

A) SPY

B) Portfolio of (SPY, MSFT, AAPL, WFC)

C) BA

D) Portfolio + BA

2. Based on Sharpe Index, which one has the best performance?

A) SPY

B) Portfolio of (SPY, MSFT, AAPL, WFC)

C) BA

D) Portfolio + BA

3. Based on the performance analysis of the 4 investment options, what can you conclude:

A) BA stock must have a lot of firm specific risk compared to other investments

B) BA stock must have a lot of market risk compared to other investments

C) BA stock must have very little firm specific risk compared to other investments

D) BA stock must have very little of market risk compared to other investments

4.Calculate Jehnsen Alpha for BA and (Portfolio + BA)

A) 0.64% and 0.80%

B) 0.26% and 0.21%

C) 1.50% and 0.90%

D) 0.79% and 0.30%

5. Calculate M2 for BA and (Portfolio + BA), use SPY as a proxy for the Market Portfolio.

A) 0.223% and 0.235%

B) 0.18% and 0.23%

C) 0.14% and 0.11%

D) 0.56% and 0.47%

                                 Graph 1                                                                          Graph 2

6.Which graph represents the correct depiction of the M2 measure for the (Portfolio + BA)?

A) Graph 1

B) Graph 2

C) Neither one

Portfolio (SPY, MSFT, AAPL, WFC) SPY BA Portfolio +BA Summary Statistics Regression Analysis Summary 1 0.05%

Explanation / Answer

1. A higher Treynor index is preferred.

So the stock BA is preferred as it has highest Treynor index.

Answer C) BA

2. A higher Sharpe ratio is also preferred.

So the correct answer is D) Portfolio + BA which has the highest Sharpe ratio.

3. Since Beta is least for BA, we can say that

C) BA stock must have very little firm specific risk compared to other investments

4.

Rf = 0.05%

Rm (SPY) = 0.7%

R (CAPM) = Rf + Beta*(Rm-Rf)

For BA

R (CAPM) = 0.05% + 0.92070 *(0.7%-0.05%)

R (CAPM) = 0.648%

Alpha = R(actual) – R(CAPM) = 1.43% - 0.648% = 0.78%

For Portfolio + BA

R (CAPM) = 0.05% + 1.15489 *(0.7%-0.05%)

R (CAPM) = 0.80%

Alpha = R(actual) – R(CAPM) = 1.09% - 0.80% = 0.29%

So the correct answer is D) 0.79% and 0.30%

5.

M2 = ((Rp-Rf)/sigma p)*sigma (market) + Rf - Rm

For BA

M2 = ((1.43%-0.05%)/6.20%)*3.71% + .05% - 0.7% =0.88% - 0.70% = 0.18%

For portfolio + BA

M2 = ((1.09%-0.05%)/4.43%)*3.71% + 0.05% - 0.7% = 0.92% - 0.7% = 0.22%

So answer is B) 0.18% & 0.23%

6.

For market portfolio M2 = Rm

Since M2 is positive, the correct graph is Graph2

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