EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 24, Problem 4CP
Summary Introduction
To calculate: Treynor performance measure for portfolio P with the help of the given information.
Introduction: Treynor ratio is defines premium of risk where premium of risk is difference of risk free rate and return. This ratio also called reward to risk ratio.
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(Using the CAPM to find expected returns) Sante Capital operates two mutual funds headquartered in Houston,
Texas. The firm is evaluating the stock of four different firms for possible inclusion in its fund holdings. As part of
their analysis, Sante's managers have asked their junior analyst to estimate the investor-required rate of return on
each firm's shares using the CAPM and the following estimates: The rate of interest on short-term U.S. Treasury
securities is currently 2.5 percent, and the expected return for the market portfolio is 10 percent. What should be
the expected rates of return for each investment?
Security
A
B
Beta
1.72
0.77
a. The expected rate of return for security A, which has a beta of 1.72, is %. (Round to two decimal places.)
You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Y and Z). You consider the following historical average return, standard deviation, and CAPM beta estimates for these two managers over the past five years:
PORTFOLIO ACTUAL AVG. RETURN STD. DEV. BETA
Manager Y 10.20% 12.00% 1.20
Manager Z 8.80% 9.90% 0.80
Additionally, your estimate for the risk premium for the market portfolio is 5.00% and the risk free rate is currently 4.50%.
a) For both Manager Y and Manager Z, calculate the expected return using the CAPM. Express your answers to the nearest basis point (i.e. xx.xx%).
b) Calculate each fund…
(Using the CAPM to find expected returns) Sante Capital operates two mutual funds headquartered in Houston, Texas. The firm is evaluating the stock of four different firms for possible inclusion in its fund holdings. As part of their analysis, Sante's managers have asked their junior analyst to estimate the investor-required rate of return on each firm's shares using the CAPM and the following estimates: The rate of interest on short-term U.S. Treasury securities is currently
4
percent, and the expected return for the market portfolio is
10
percent. What should be the expected rates of return for each investment?
Security
Beta
A
1.67
B
0.58
C
1.14
D
0.78
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Part 1
a. The expected rate of return for security A, which has a beta of
1.67,
is
enter your response here%.
(Round to two decimal places.)
Part 2
b. The expected…
Chapter 24 Solutions
EBK INVESTMENTS
Ch. 24 - Prob. 1PSCh. 24 - Prob. 2PSCh. 24 - Prob. 3PSCh. 24 - Prob. 4PSCh. 24 - Prob. 5PSCh. 24 - Prob. 6PSCh. 24 - Prob. 7PSCh. 24 - Prob. 8PSCh. 24 - Prob. 9PSCh. 24 - Prob. 10PS
Ch. 24 - Prob. 11PSCh. 24 - Prob. 12PSCh. 24 - Prob. 13PSCh. 24 - Prob. 14PSCh. 24 - Prob. 15PSCh. 24 - Prob. 16PSCh. 24 - Prob. 17PSCh. 24 - Prob. 18PSCh. 24 - Prob. 19PSCh. 24 - Prob. 20PSCh. 24 - Prob. 21PSCh. 24 - Prob. 22PSCh. 24 - Prob. 1CPCh. 24 - Prob. 2CPCh. 24 - Prob. 3CPCh. 24 - Prob. 4CPCh. 24 - Prob. 5CPCh. 24 - Prob. 6CPCh. 24 - Prob. 7CPCh. 24 - Prob. 8CPCh. 24 - Prob. 9CPCh. 24 - Prob. 10CPCh. 24 - Prob. 11CPCh. 24 - Prob. 12CPCh. 24 - Prob. 13CPCh. 24 - Prob. 14CP
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