tycoon

 

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.

Equity Fund S& 500

Return 32% 26%

Standard Deviation 41% 29%

Beta 0.98 1.00

Risk-free rate is 6.00%

The difference between the Sharpe ratio for the equity fund and the Sharpe ratio for the S& 500 is the:

The difference between the Sharpe ratio for the equity fund and the Sharpe ratio for the S& 500 is the:

A) S& 500 is 0.09 higher.

B) equity fund is 0.06 lower.

C) S& 500 is 0.04 lower.

D) equity fund is 0.51 higher.

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Answer and Explanation

The equity fund Sharpe ratio: (0.32 0.06)/0.41 = 0.63

The S& 500 Sharpe ratio: (0.26 0.06)/0.29 = 0.69

The equity fund is (0.63 0.69) = -0.06 lower

The equity fund Sharpe ratio: (0.32 0.06)/0.41 = 0.63

The S& 500 Sharpe ratio: (0.26 0.06)/0.29 = 0.69

The equity fund is (0.63 0.69) = -0.06 lower

tycoon

 

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.

Equity Fund S& 500

Return -12% -16%

Standard Deviation 15% 19%

Beta 1.18 1.00

Risk-free rate is 6.00%

The difference between the Treynor measure for the equity fund and the Treynor measure for the S& 500 is:

The difference between the Treynor measure for the equity fund and the Treynor measure for the S& 500 is:

A) 0.17.

B) 0.07.

C) 0.15.

D) 0.21.

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Answer and Explanation

The equity fund: (-0.12 0.06)/1.18 = -0.15

The S& 500: (-0.16 0.06)/1.00 = -0.22

The equity fund is (-0.15 (-0.22) = 0.07 higher

The equity fund: (-0.12 0.06)/1.18 = -0.15

The S& 500: (-0.16 0.06)/1.00 = -0.22

The equity fund is (-0.15 (-0.22) = 0.07 higher

tycoon

Which of the following statements about fund performance is TRUE?

A) When analyzing the performance of a bond portfolio the manager should be evaluated relative to a style universe. Focusing on maturity ranges or a particular market segment is not one of the accepted style universes.

B) An equity fund had a return over the past year of 17% and a standard deviation of returns of 12%. During this period the risk-free return was 3%. The Sharpe ratio for the fund was 1.17.

C) An investment style focusing on small capitalization stocks is likely to result in a portfolio with a low beta.

D) A fund had total excess return of 1.82%. Of the total, 1.60% was due to the style of the fund that was specified by the sponsor, and 0.22% was due to security selection. The amount of the excess return that should be credited to the fund manager is 1.82%.

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Answer and Explanation

The Sharpe ratio = (0.17 0.03)/).12 = 1.17.

Note that focusing on maturity ranges or a particular market segment are definitions of style for a bond portfolio manager. Also, an investment style focusing on small capitalization stocks is likely to result in a portfolio with a higher beta and a lower dividend yield. Further, managers whose styles are specified for them should only get credit for the excess return that is due to security selection.

Note that focusing on maturity ranges or a particular market segment are definitions of style for a bond portfolio manager. Also, an investment style focusing on small capitalization stocks is likely to result in a portfolio with a higher beta and a lower dividend yield. Further, managers whose styles are specified for them should only get credit for the excess return that is due to security selection.

The Sharpe ratio = (0.17 0.03)/).12 = 1.17.

Note that focusing on maturity ranges or a particular market segment are definitions of style for a bond portfolio manager. Also, an investment style focusing on small capitalization stocks is likely to result in a portfolio with a higher beta and a lower dividend yield. Further, managers whose styles are specified for them should only get credit for the excess return that is due to security selection.

Note that focusing on maturity ranges or a particular market segment are definitions of style for a bond portfolio manager. Also, an investment style focusing on small capitalization stocks is likely to result in a portfolio with a higher beta and a lower dividend yield. Further, managers whose styles are specified for them should only get credit for the excess return that is due to security selection.

tycoon

 

An analyst has generated the following information about risk/return performance using the Sharpe ratio and the Treynor measure:

An analyst has generated the following information about risk/return performance using the Sharpe ratio and the Treynor measure:

                                                            Equity Fund         S& 500

                           Sharpe ratio                     0.47                  0.42

                           Treynor measure              0.31                  0.34

Which of the following statements about the relative risk/return performance of the funds is TRUE?  The:

Which of the following statements about the relative risk/return performance of the funds is TRUE?  The:

A) Treynor measure shows the fund outperformed the S& 500 on a systematic risk-adjusted basis.

B) Sharpe ratio shows the equity fund underperformed the S& 500 on a systematic risk-adjusted basis.

C) Treynor measure shows the fund underperformed the S& 500 on a total risk-adjusted basis.

D) Sharpe ratio shows the equity fund outperformed the S& 500 on a total risk- adjusted basis.

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Answer and Explanation

With either the Sharpe or Treynor methodology, a higher number means a higher risk-adjusted return. Since the Sharpe ratio is 0.05 higher, it outperformed the S& 500. Note that the key difference between the Sharpe and Treynor measures is that the Sharpe ratio measures return per unit of total risk, while Treynor measures return per unit of systematic risk.

With either the Sharpe or Treynor methodology, a higher number means a higher risk-adjusted return. Since the Sharpe ratio is 0.05 higher, it outperformed the S& 500. Note that the key difference between the Sharpe and Treynor measures is that the Sharpe ratio measures return per unit of total risk, while Treynor measures return per unit of systematic risk.

tycoon

 

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.   Using Jensens Alpha to measure the risk/return performance of the Equity fund and the S& 500, which of the following conclusions is TRUE?  The:

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.   Using Jensens Alpha to measure the risk/return performance of the Equity fund and the S& 500, which of the following conclusions is TRUE?  The:

                                                         Equity Fund            S& 500

                   Return                                  23%                     27%           

                   Standard Deviation                15%                     19%

                   Beta                                   1.09                    1.00

                   Risk-free rate is 3.50%

A) S& 500 outperformed the equity fund by 3.24%.

B) S& 500 underperformed the equity fund by 2.67%.

C) Equity fund outperformed the S& 500 by 5.04%.

D) Equity fund underperformed the S& 500 by 6.12%.

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Answer and Explanation

Jensens Alpha: 0.23 [0.035 + (0.27 0.035)1.09] = -0.0612 or -6.12%. The negative means it underperformed the S& 500.

Jensens Alpha: 0.23 [0.035 + (0.27 0.035)1.09] = -0.0612 or -6.12%. The negative means it underperformed the S&P 500.

tycoon

Which of the following statements about risk/return investment manager performance measures is FALSE?

A) When measuring the performance of an equity fund, if the Sharpe ratio is 0.55, and the Treynor measure is 0.47, the difference is attributable to unsystematic (company-specific) risk.

B) The Treynor measure includes company-specific risk as part of its performance measurement.

C) The Sharpe measure includes company-specific risk as part of its performance measurement.

D) Jensen's Alpha measures equity fund performance relative to what the portfolio would have returned had it been on the security market line (SML).

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Answer and Explanation

The Treynor measure does not include company-specific risk, it uses beta in the denominator, which only measures systematic risk. Note that the Sharpe measure uses standard deviation in its denominator, which is a measure of total risk.

The Treynor measure does not include company-specific risk, it uses beta in the denominator, which only measures systematic risk. Note that the Sharpe measure uses standard deviation in its denominator, which is a measure of total risk.

tycoon

The following performance data for an actively managed portfolio and the S& 500 Index is reported:

	Actively Managed Portfolio	S& 500
Return	50%	20%
Standard deviation	18%	15%
Beta	1.1	1.0

Risk-free rate = 6 percent.

Determine the Sharpe measure, Treynor measure, and Jensen's alpha for the actively managed portfolio.

A) Sharpe measure = 1.04; Treynor measure = 0.14; Alpha = 0.04.

B) Sharpe measure = 2.44; Treynor measure = 0.40; Alpha = 0.29.

C) Sharpe measure = 1.05; Treynor measure = 0.17; Alpha = 0.04.

D) Sharpe measure = 1.06; Treynor measure = 0.12; Alpha = 0.02.

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Answer and Explanation

Sharpe measure for active portfolio = (0.50 - 0.06)/0.18 = 2.44

Treynor measure for active portfolio = (0.50 - 0.06)/1.1 = 0.40

Alpha for active portfolio = 0.50 [0.06+(0.20 - 0.06) x 1.1)] = 0.29

Treynor measure for active portfolio = (0.50 - 0.06)/1.1 = 0.40

Alpha for active portfolio = 0.50 [0.06+(0.20 - 0.06) x 1.1)] = 0.29

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Based on the results from determining the Sharpe measure, Treynor measure, and Jensen's alpha for the actively managed portfolio, does the portfolio manager outperform or underperform the S& 500 index?

A) Sharpe measure → underperform; Treynor measure → outperform; Alpha → outperform

B) Sharpe measure → outperform; Treynor measure → underperform; Alpha → underperform.

C) Sharpe measure → outperform; Treynor measure → outperform; Alpha → outperform.

D) Sharpe measure → underperform; Treynor measure → underperform; Alpha → underperform.

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Answer and Explanation

Sharpe measure for S& portfolio = (0.20 - 0.06)/0.15 = 0.93

Treynor Measure for S& portfolio = (0.20 - 0.06)/1.0 = 0.14

Alpha for S& portfolio = 0

Hence, the portfolio manager outperforms based on all the three performance evaluation methods.

Treynor Measure for S& portfolio = (0.20 - 0.06)/1.0 = 0.14

Alpha for S& portfolio = 0

Hence, the portfolio manager outperforms based on all the three performance evaluation methods.

tycoon

The ratio of return to systematic risk for an investment portfolio is 0.70, while the market is 0.50. This information suggests that the portfolio:

A) exhibits superior performance because the return per unit of risk is above that of the market.

B) exhibits inferior performance because it has more risk than the market.

C) is too diversified, and some securities should be sold to bring the portfolio in line with the market.

D) is not diversified enough, and more securities should be purchased to bring the portfolio in line with the market.

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Answer and Explanation

Risk-averse investors prefer a portfolio with a higher ratio of return to systematic risk to a portfolio with a lower ratio. In this case, we can also say that the portfolio would plot above the SML since the portfolio's ratio is above that of the market. Since portfolios that plot above the SML are undervalued, they are likely to provide an above average return. Note: The ratio (Treynor's Measure) implicitly assumes a diversified portfolio, hence the use of beta (or systematic risk) in the denominator.

tycoon

The Sharpe Ratio is correctly defined as a measure of a funds:

A) excess return earned compared to its systematic risk.

B) excess return earned compared to its total risk.

C) return earned compared to its unsystematic risk.

D) return earned compared to its total risk.

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Answer and Explanation

The Sharpe ratio is defined as a funds excess return (funds return minus the risk-free rate) divided by the total risk (standard deviation).

tycoon

If a portfolio had an alpha of −10 bps, then the portfolio:

A) had less risk than the market.

B) earned 10 bps less than the market on a risk-adjusted basis.

C) earned 10 bps less than the market.

D) had a return of 10 bps.

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Answer and Explanation

Recall that Jensens alpha measures excess return for a given level of risk. It is a risk-adjusted measure of return.