The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below.
-Based on the M² measure,portfolio C has a superior return of _____ as compared to the S&P500.

Question

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below.

-Based on the M² measure,portfolio C has a superior return of _____ as compared to the S&P500.

Quizplus · Accepted Answer

To calculate the M² measure, we first calculate the excess return of each fund and the S&P500 over the risk-free rate (3.5% in this case). Excess return = Average return - Risk-free rate Then, we calculate the portfolio excess return and portfolio beta using the weighted average of each fund's excess return and beta. Portfolio excess return = Weighted average of fund excess returns Portfolio beta = Weighted average of fund betas Finally, we calculate the M² measure using the following formula: M² = Portfolio excess return - (Portfolio beta * (S&P500 return - Risk-free rate)) Using this formula, we get: Portfolio A: M² = -1.50% Portfolio B: M² = 0.00% Portfolio C: M² = 2.00% Therefore, the correct answer is C) 2.00%, as portfolio C has a superior return of 2.00% compared to the S&P500 after adjusting for risk.

The Risk Free Rate, Average Returns, Standard Deviations and Betas