Question

Use the information below to compare the performance of your portfolio P with that of the stock market: Calculate the Sharpe ratio, the Treynor ratio, the ? (Alpha), and the M² of your portfolio P. Recall that the Alpha of your portfolio is the difference between the expected return of your portfolio (calculated using the CAPM model) and its actual return.

                        Portfolio (P)                            Stock Market (M)                    T-bills

Return             10%                                         8%                                           0.5%

STD (returns)   20%                                         12%                                         0

?eta                0.8                                           1

PLEASE SHOW WORK

Answer 1

sharpe ratio	(expected return-risk free rate)/ standard deviation of stock	(10%-.5%)/20%	0.475
Treynor ratio	(expected return-risk free rate)/ standard deviation of stock	(10%-.5%)/.8	0.11875
Alpha of stock	expected return-required return	10%-6.5%	3.500%
M2 of portfolio	(sharpe ratio*standard deviation of market )+risk free rate	(.475*12%)+.5%	0.062
required return on stock	risk free rate+(market return-risk free return)*beta	.5%+(8%-.5%)*.8	6.500%