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 100- to 200-word essay.

 

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

 

Calculate the Sharpe ratio, Treynor ratio, Jensen’s alpha, information ratio, and R-squared for both funds and determine which is the best choice for your portfolio

 


22.       Dollar-Weighted Average Return (LO3, CFA6)        Suppose that an investor opens an account by investing $1,000. At the beginning of each of the next four years, he deposits an additional $1,000 each year, and he then liquidates the account at the end of the total five-year period. Suppose that the yearly returns in this account, beginning in year 1, are as follows: 12 percent, 5 percent, 8 percent, 7 percent, and 14 percent. Calculate the arithmetic and geometric average returns for this investment, and determine what the investor’s actual dollar-weighted average return was for this five-year period. Why is the dollar-weighted average return higher or lower than the geometric average return?

 

 (BUS 405, p. 64)

 

 BUS 405. McGraw-Hill Create. Retrieved from <vbk:9781121253254#page(64)>.