You have collected 6 years of monthly data on return of funds ABC and XYZ as well as on S&P/TSX composite index and the government short-term bills (risk-free). You have run two (excess return) index-model regressions for the two bonds and the results are as follows:
for ABC
rp- rf= .017 +1.2( rM- rf) + 2.3( rM-rf)^2 R^2 =0.92
for XYZ
rp - rf= 0.11+1.6(rM- rf) + 1.0( rM-rf)^2 R^2=0.75
All regression coefficients are statistically significant at 1% confidence interval.
a. Which fund has a higher systematic risk? Why?
b. Which fund has a higher residual risk? Why?
c. Which fund has a higher abnormal return? Why?
d. The risk-free rate over the period was 5 percent, and the market’s average return was 15 percent. Standard deviation of excess return for ABC and XYZ are 20% and 25%. Calculate Sharpe and Treynor’s measure for each fund.