Suppose that portfolio Y has a 20% return and 22% standard deviation. Market portfolio has a 15% return and 15% standard deviation. The annual risk-free rate is 5%. What is the M² measure? A) 0.57% B) -1.5% C) 0.23% D) 8.0% E) -0.75%

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Quizplus · Accepted Answer

The M² measure refers to the Sharpe Ratio, which is calculated as follows: Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Standard Deviation For portfolio Y: Sharpe Ratio = (20% - 5%) / 22% = 0.6818 For the market portfolio: Sharpe Ratio = (15% - 5%) / 15% = 0.6667 Therefore, the M² measure for portfolio Y is higher than that of the market portfolio, indicating that portfolio Y has a better risk-adjusted return. The only choice that matches this calculation is C, 0.23%.

Suppose That Portfolio Y Has a 20% Return and 22