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3 Q12.41. (22 points) You believe that Fund J, Fund K, and a Market index fund will have the following return characteristics over the next several years. You expect T-Bills to earn 0.5%. Expected Standard Market Risk Sharpe M2 Treynor Alpha T2 Return Deviation Beta Premium Ratio Ratio Fund J 6.5% 30% 1.00 6.0% 0.200 -0.9% 6.0% 1.50% 1.5% Fund K 4.5% 12% 0.60 4.0% 0.333 1.5% 6.7% 1.30% 2.2% Market 5.0% 18% 1.00 4.5% 0.250 0.0% 4.5% 0.00% 0.0% T-Bills 0.5% 0% 0.0 0.0% 0.00% a) In which of these 3 funds (Fund J, Fund K, or the Market Index) should you invest your total portfolio if you are (i) completely unconcerned about either total risk or market-wide risk and (ii) unwilling to use leverage of any kind? Show calculations, if any, and briefly discuss. b) Calculate (1) M2, (ii) Jensen's alpha and (ii) T2 performance measures for Fund J and Fund K. c) In which of these 3 funds should you choose to invest your total portfolio, along with lending or borrowing at the risk-free rate, if you are (1) averse to risk and (ii) villing to use leverage? Show calculations, if any, and briefly discuss d) In which of these 3 funds should you choose to invest a fraction of your total portfolio, while lending or borrowing at the risk-free rate, if you are (1) averse to risk and (ii) willing to use leverage? Show calculations, if any, and briefly discuss. nited States Focus 3 Q12.41. (22 points) You believe that Fund J, Fund K, and a Market index fund will have the following return characteristics over the next several years. You expect T-Bills to earn 0.5%. Expected Standard Market Risk Sharpe M2 Treynor Alpha T2 Return Deviation Beta Premium Ratio Ratio Fund J 6.5% 30% 1.00 6.0% 0.200 -0.9% 6.0% 1.50% 1.5% Fund K 4.5% 12% 0.60 4.0% 0.333 1.5% 6.7% 1.30% 2.2% Market 5.0% 18% 1.00 4.5% 0.250 0.0% 4.5% 0.00% 0.0% T-Bills 0.5% 0% 0.0 0.0% 0.00% a) In which of these 3 funds (Fund J, Fund K, or the Market Index) should you invest your total portfolio if you are (i) completely unconcerned about either total risk or market-wide risk and (ii) unwilling to use leverage of any kind? Show calculations, if any, and briefly discuss. b) Calculate (1) M2, (ii) Jensen's alpha and (ii) T2 performance measures for Fund J and Fund K. c) In which of these 3 funds should you choose to invest your total portfolio, along with lending or borrowing at the risk-free rate, if you are (1) averse to risk and (ii) villing to use leverage? Show calculations, if any, and briefly discuss d) In which of these 3 funds should you choose to invest a fraction of your total portfolio, while lending or borrowing at the risk-free rate, if you are (1) averse to risk and (ii) willing to use leverage? Show calculations, if any, and briefly discuss. nited States Focus

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