6. If two portfolios are well-diversified with a risk-free rate of 3.11% and the S&P market return for the past year has bee
n 12.87%. Portfolio ABC has a return of 15.75% and has a beta of 1.4, while Portfolio XYZ returns 11.92% and has a beta of .85. Based on Jack Treynor's Model what are the Treynor Indexes for each stock, and assuming that the correlation of each the same, which stock would you add to your own portfolio based solely on the results of the Treynor Index? And what results would the Jensen Model provide and what would be your decision then?
1 answer:
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Answer:
$1,061.28
Explanation:
We need to calculate the present value of the bond using the minimum effective rate of 7.1225%
First we calcualte the present value of an annuity of $80 for 10 years
PV = $558.72
Then we calculate the $1,000 in 10 years present value
PV = $502.57
Then we add both values
$502.57 + $558.72 = $1,061.28
This will be the present value AKA market price which yields the minimun rate of 7.1225%