Consider the two (excess return) index-model regression results for stocks a and b. the riskfree rate over the period was 7%, and the market’s average return was 12%. performance is measured using an index model regression on excess returns.

stock a stock b
index model regression estimates 1% + 1.2(rm – rf) 2% + .8(rm – rf)
r-square 0.623 0.46
residual standard deviation, σ(e) 11.1% 19.9%
standard deviation of excess returns 22.4% 26.5%

a. calculate the following statistics for each stock: (round your answer to 4 decimal places. omit the "%" sign in your response.)

i. alpha
ii. information ratio
iii. sharpe measure
iv. treynor measure

b. which stock is the best choice under the following circumstances?

i. this is the only risky asset to be held by the investor.

ii. this stock will be mixed with the rest of the investor’s portfolio, currently composed solely of holdings in the market-index fund.

iii. this is one of many stocks that the investor is analyzing to form an actively managed stock portfolio.

Suppose that hubert, an economist from an am talk radio program, and kate, an economist from a nonprofit organization on the west coast, are arguing over government bailouts. the following dialogue shows an excerpt from their debate: kate: to recent financial crises, the concept of bailouts is a hot topic for debate among everyone these days. hubert: indeed, it’s gotten crazy! a government bailout of severely distressed financial firms is unnecessary because free markets will properly price assets. kate: i don’t know about that. without a bailout of severely distressed financial firms, the economy will experience a deep recession. the disagreement between these economists is most likely due todifferences in scientific judgments . despite their differences, with which proposition are two economists chosen at random most likely to agree? business managers can raise profit more easily by reducing costs than by raising revenue. central banks should focus more on maintaining low unemployment than on maintaining low inflation. employers should not be restricted from outsourcing work to foreign nations

If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. there are two approaches to use to account for flotation costs. the first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. because the investment cost is increased, the project's expected return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. the second approach involves adjusting the cost of common equity as follows: . the difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment. quantitative problem: barton industries expects next year's annual dividend, d1, to be $1.90 and it expects dividends to grow at a constant rate g = 4.3%. the firm's current common stock price, p0, is $22.00. if it needs to issue new common stock, the firm will encounter a 6% flotation cost, f. assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%. what is the flotation cost adjustment that must be added to its cost of retaine

Why does an organization prepare a balance sheet? a. to reveal what the organization owns and owes at a point in time b. to reveal how well the company utilizes its cash c. to calculate retained earnings for a given accounting period d. to calculate gross profit for a given accounting period