The risk free rate of return for the relevant period was 3%. Portfolio 1 Portfol
ID: 2799847 • Letter: T
Question
The risk free rate of return for the relevant period was 3%.
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Market index
Return
7.45%
10.96%
8.44%
6.88%
7.60%
Beta
0.98
1.12
1.36
0.80
1
Standard
deviation
3.74%
4.18%
3.78%
2.90%
2.80%
1. Estimate the Jensen’s alpha for portfolio 1
a. 0.0751
b. 0.0006
c. 0.0454
d. None of the above
2. Estimate the Treynor ratio for portfolio 2
a. 0.0926
b. 1.9043
c. 0.0400
d. None of the above
3. Estimate the Sharpe ratio for portfolio 3
a. 0.0400
b. 1.4392
c. 1.1898
d. None of the above
4.Estimate Jensen’s alpha for the market index.
a. 0.0530
b. 0.0000
c. 1.0650
d. None of the above
5.Estimate M2 for portfolio 4.
a. 0.0797
b. 0.1020
c. 0.0675
d. None of the above
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Market index
Return
7.45%
10.96%
8.44%
6.88%
7.60%
Beta
0.98
1.12
1.36
0.80
1
Standard
deviation
3.74%
4.18%
3.78%
2.90%
2.80%
Explanation / Answer
Answer 1) Jenson's Alpha = Portfolio return - [ Risk free rate + Beta *(Market return-risk free rate)]
= 7.45%- [3% + 0.98 *(7.6%-3%)]
= -0.0006
Answer option b)
Answer 2) Treynor ratio = (portfolio return - risk free rate) / Beta
= (10.96% - 3%) / 1.12
= 0.07107
Answer d) Non of the above option
Answer 3) Sharpe ratio = Portfolio return - risk free rate / St. deviation
=(8.44%-3%) / 3.78%
= 1.4392
Answer) Option b
Answer 4)
Jensons Alpha = Return of market index - [Risk free rate + Beta * (Return of market - Risk free rate)
=7.6% - [ 3%+1*(7.6%-3%)]
= 7.6% - [3%+4.6%]
=0%
Answer option b)
Answer 5) M2 = Risk free rate + Porfolio sharpe ratio x market st. deviation
M2 = 3% + (6.88%-3%)/2.90% x (2.80%)
M2 = 0.0675
Option c)
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