Question

The following data are available relating to the performance of Aloha Fund and the market portfolio:

	Aloha Fund	Market Portfolio
Average Return	18%	14%
Standard deviations of returns	30%	22%
Beta	1.4	1.0
Residual Standard Deviation	4.0%	0.0%

The risk-free return during the sample period was 6%.

If you wanted to evaluate the Aloha Fund using the M² measure, approximately what percent of the adjusted portfolio would need to be invested in T-Bills?

Select one:

a. 73%

b. 27%

c. 8%

d. 36%

e. -36% (borrow)

Answer 1

C. M² measure of seminole portfolio = 8%

M squared can be computed with following equation:

where,

Rp = Portfolio return

Rm = Market return

Rf = risk free rate

Putting the values: