Problem 22 in the Questions and Problems

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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 one­page essay following APA guide­
lines.
You have been given the following return information for two mutual funds (Papa and Mama), the market index, and the risk­free rate. Year Papa
Fund Mama
Fund Market Risk­Free 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 Ex­
cess Mama
Fund Ex­
cess Market
Ex­
cess 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=(7.8­2.4) divided by 14.25=.384561
MF+(2.48­2.4) divided by 15.66=.005108
Treynor ratio (7.88­2.40) divided by 80.99 (Beta)=.06766
(2.48­2.40) divided by 93.42=.085634
Jensen’s alpha:
7.88­2.40­.8099 x (1.96­2.40)
7.88­2.40­ ­.356356=5.836356
2.48­2.40­.9342(2.48­2.40)
2.48­2.4­ ­.4119768=.4919768 information ratio :
5.84/4.68=1.24786
.49/1.13=.43362
Alpha divided by tracking error
R­squared 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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