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You have the following investment opportunities: Asset Expected Return Standard Deviation Market Portfolio 9.1% 15.2% Portfolio...

You have the following investment opportunities:

Asset Expected Return Standard Deviation
Market Portfolio 9.1% 15.2%
Portfolio A 10.8% 18.4%

You know that t-bills have a return of 2.4%. What is the M2 measure of portfolio A?

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Answer #1

First we need to calculate Sharpe Ratio

Sharpe Ratio = [rA - rF] / SD(A)

= [10.8% - 2.4%] / 18.4% = 8.4% / 18.4% = 0.46

Now,

M2 = rF + [Sharpe Ratio x SD(M)]

= 2.4% + [0.46 x 15.2%] = 2.4% + 6.94% = 9.34%

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