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Complete Problem 22 in the Questions and Problems section of Chapter 13 (shown below). When you pick the best choice for your portfolio, defend your decision in a one-page essay following APA guidelines

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Complete Problem 22 in the Questions and Problems section of Chapter 13 (shown below).  When you pick the best choice for your portfolio, defend your decision in a one-page essay following APA guidelines.

You have been given the following return information for two mutual funds (Papa and Mama), the market index, and the risk-free rate.

Year Papa Fund Mama Fund   Market Risk-Free
2008 -12.6% -22.6%   -24.5% 1%
2009 25.4% 18.5%   19.5% 3%
2010 8.5% 9.2%   9.4% 2%
2011 15.5% 8.5%   7.6% 4%
2012 2.6% -1.2%   -2.2% 2%
Avg 7.88% 2.46%   1.96% 2.40%
Standard Deviation 14.25% 15.66%   16.68%  
Tracking Error 4.68% 1.13%      
Alpha 5.84% .49%      
Beta .8099 .9342      
Info Ratio 1.2478 .43362      
Correlation .9635 .9996      
Year Papa Fund Excess Mama Fund Excess Market Excess Papa Fund Excess Diff Mama Fund Excess Diff
2008 -13.60% -23.60% -25.50% 11.90% 1.90%
2009 22.40% 15.50% 16.50% 5.90% -1.00%
2010 6.50% 7.20% 7.40% -0.90% -0.20%
2011 11.50% 4.50% 3.60% 7.90% 0.90%
2012 0.60% -3.20% -4.20% 4.80% 1.00%

Calculate the Sharpe ratio-

PF=(7.8-2.4) divided by 14.25=.384561

MF+(2.48-2.4) divided by 15.66=.005108

Treynor ratio

(7.88-2.40) divided by 80.99 (Beta)=.06766

(2.48-2.40) divided by 93.42=.085634

Jensen’s alpha:

7.88-2.40-.8099 x (1.96-2.40)

7.88-2.40- -.356356=5.836356

2.48-2.40-.9342(2.48-2.40)

2.48-2.4- -.4119768=.4919768

 information ratio :

5.84/4.68=1.24786

.49/1.13=.43362

Alpha divided by tracking error

R-squared for both funds and determine which is the best choice for your portfolio.

.9635 x .9635=.9283=92.83%

.9996 x .9996=99.92%

 
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