Calculate the information ratio as a decimal not percentage

Reference no: EM133664052

Problem: An analyst who believes in the Treynor - Black Model has identified one active stock, stock A, which he/she wants to combine with the passive Market Index M to form their firm's optimal risky portfolio. A regression of the excess returns of stock A on the excess returns of the market index M, have discovered that stock A's alpha is 4%, its beta is 2.0, and the residual standard deviation of the error term for stock A is 18%. The standard deviation for the market index M is 14%, the expected return on M is 11%, the risk-free rate of return is 3%, and the expected return on stock A is 22%. What is active stock A's information ratio? Calculate the information ratio as a decimal not a percentage. What is the Sharpe Ratio for the optimal risky portfolio formed by the optimal combination of the active stock A with the passive market index M? Note that the Sharpe Ratio is usually expressed as a decimal. What percentage of the optimal risky portfolio formed with A and M should be invested in active stock A?

Reference no: EM133664052

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