An analyst wants to evaluate Portfolio X consisting entirely of US common stocks, using both the Treynor and Sharpe measures of the portfolio performance. The following table provides the average annual rate of return for the portfolio X the market portfolio (as measured by the Standard & Poor's 500 index) and US Treasury billds (Tbills) during the past eight years Average Return Standard deviation Beta Portfolio X 10% 18% 0.6 S & P 500 12% 13% 1 T bills 6% n/a n/a a. Calculate both the Treynor measure and the Sharpe measure for both Portfolio X and the S&P 500. Briefly explain whether portfolio X underperformed, equalled, or outperformed the S&P 500 on a risk-adjusted basis using both the Treynor measure and the Sharpe measure. b. Based on the performance of Portfolio X relative to the S&P 500 calculated in part a, briefly explain the reason for the conflicting results when using the Treynor measure versus the Sharpe measure.
An analyst wants to evaluate Portfolio X consisting entirely of US common stocks, using both the Treynor and Sharpe measures of the portfolio performance. The following table provides the average annual rate of return for the portfolio X the market portfolio (as measured by the Standard & Poor's 500 index) and US Treasury billds (Tbills) during the past eight years Average Return Standard deviation Beta Portfolio X 10% 18% 0.6 S & P 500 12% 13% 1 T bills 6% n/a n/a a. Calculate both the Treynor measure and the Sharpe measure for both Portfolio X and the S&P 500. Briefly explain whether portfolio X underperformed, equalled, or outperformed the S&P 500 on a risk-adjusted basis using both the Treynor measure and the Sharpe measure. b. Based on the performance of Portfolio X relative to the S&P 500 calculated in part a, briefly explain the reason for the conflicting results when using the Treynor measure versus the Sharpe measure.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter2: Risk And Return: Part I
Section: Chapter Questions
Problem 13P
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
| An analyst wants to evaluate Portfolio X consisting entirely of US common stocks, using both the Treynor and Sharpe measures of the portfolio performance. The following table provides the average annual |
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| (as measured by the Standard & Poor's 500 index) and US Treasury billds (Tbills) during the past eight years | ||||||||||||||||
| Average Return | Standard deviation | Beta | ||||||||||||||
| Portfolio X | 10% | 18% | 0.6 | |||||||||||||
| S & P 500 | 12% | 13% | 1 | |||||||||||||
| T bills | 6% | n/a | n/a | |||||||||||||
| a. Calculate both the Treynor measure and the Sharpe measure for both Portfolio X and the S&P 500. Briefly explain whether portfolio X underperformed, equalled, or outperformed the S&P 500 on a risk-adjusted basis using both the Treynor measure and the Sharpe measure. | ||||||||||||||||
| b. Based on the performance of Portfolio X relative to the S&P 500 calculated in part a, briefly explain the reason for the conflicting results when using the Treynor measure versus the Sharpe measure. | ||||||||||||||||
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