Problem Set 6

Key questions: Q1, Q2

Selected end‐of‐chapter questions

BKM Chapter 24: Q8, 9, 11, 16, 18, 21
 Q1
The fund F has been investing in stocks and bonds. Given their strategy, an appropriate
benchmark portfolio is B. The performance and weights of F and B over the last year are given
in the table below.

Asset class 𝑤𝐹 𝑤𝐵 𝑟𝐹 𝑟𝐵
Stocks 0.8 0.75 11% 8%
Bonds 0.2 0.25 3% 5%

a. To what would you attribute the performance of F relative to B in the stock category?
b. To what would you attribute the performance of F relative to B in the bonds category?
c. To what would you attribute the total performance of F relative to B?

Q2
You want to evaluate the stocks 𝑋 and 𝑌 using the data in the table below. The risk-free rate, 𝑟𝑓 ,
is 3%.
Asset E(r) 𝛽 𝜎
X 16% 1.3 40%
Y 9% 0.9 30%
M 12% 1 20%

(a) Suppose you’re planning let either X or Y constitute your entire risky investment. Which
would you choose and why?
(b) Suppose you’re planning to add a small amount of either X or Y to your well-diversified
portfolio. Which would you choose and why?
(c) Suppose you’re planning to use either X or Y to exploit mispricing in the market. Which
would you choose and why?
(d) What is the 𝑀2 measure for the two stocks?

Now from a new portfolio, 𝑍, by taking a leveraged position in asset 𝑋. Specifically, invest
150% of your wealth in asset 𝑋 and finance it with an appropriate short position in the risk-free
asset

(e) What is the Treynor measure of asset 𝑍?

(f) What is the 𝛼 of asset 𝑍?
(g) What is the Information Ratio of asset 𝑍?