A small stock that you are following has an alpha = 8% and a standard deviation of its regression residuals of 24.50%. The Sharpe ratio of the market index portfolio M is 0.45. According to the Treynor–Black Model, by how much could this active investor improve his/her Sharpe ratio relative to investing only in the passive market index portfolio M? Please calculate the difference between the Sharpe Ratio for the optimal Treynor–Black portfolio and the market index portfolio M. Note that the Sharpe Ratio is usually expressed as a decimal. Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.
Using the small active stock from Problem 12, what is the small active stock’s information ratio? Please calculate the information ratio as a decimal not a percentage. Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.
