Interest Rates and Coupon Bonds in Quantum Finance - Essay Example

This measure relates the rate of return earned above the risk-free rate to the portfolio beta during the period under consideration

Ti =  

Where Ri is the average return rate for a portfolio during a given period of time

R s is the average return on free risk investment during a given period of time

Βi is the beta of portfolio I at a given point in time

Performance in relation to the market(S&P500)

T =  = 6.7 % this is outer performed

Security Market line (S&P 500)

Tm =  = 6%

Treynor measures portfolio performance in relation to the security market line (SLM). Because the portfolio plot above the SLM, it outer performed in relation to S&P 500 index. T was greater than TMs 6.7 % versus 6% respectively.

Sharpe measure

Measures return rate earned above the risk-free rate to the general risk of the portfolio by including standard deviation 

S =  where ri is the average return rate for the portfolio in a given period of time, it is the average return rate on a risk-free investment, and is the standard deviation of the rate of return on a portfolio.

Performance in relation to the market (S&P 500)

S =    this shows an underperformance

Capital Market line (S&P 500)

SM =  = 0.462%

Sharpe measure compares the portfolio with the capital market line (CML). The portfolio plots below the CML indicate that indeed it underperformed in the market. This is because the SM was 0.222% against 0.462% respectively, and the portfolio really underperformed in the market.

1. Treynor measures appropriate risk for a portfolio and its systematic risk or beta. It assumes that a portfolio is fully diversified. The Sharpe is similar to the Treynor except that the return of the portfolio is divided by the standard deviation. In a poorly performed portfolio, Treynor is used but has lower performance relative to the market if the Sharpe measure is used.
2. The return on the market is 8% the forecast monthly return for GM IS 0.1% = (1.1*8) % = 8.9%. The GM’s real return was 7% so the calculation of abnormal return comes to -1.9%
3. The investor should buy a three-year bond because it offers a 9% holding–period return over the next year. This is a greater return than any other kind of bond (Baaquie, 2010).