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LOS q, (Part 1): Compare and contrast the information ratio, Treynor measure, and Sharpe ratio. ffice ffice" />
Q1. Jim Kyle has been the manager of the Superior Asset Portfolio for the past ten years. During this time, ffice:smarttags" />Superior’s average return was 14.50%. For the purpose of performance evaluation, the Superior Asset Portfolio is compared to the S& 500. During the same time period, the S& 500 had an average annual return of 18%. The standard deviation of surplus return is 23%. What is Superior’s information ratio?
A) 0.16.
B) -0.56.
C) –0.15.
Correct answer is C)
Information ratio = IRj = SRj / σSR = (14.50 - 18) / 23 = -0.15
Q2. Jack Gallon is a portfolio manager whose fund sponsor would like to evaluate his performance. It is very important to the fund sponsor to minimize tracking risk. Which of the following would be most appropriate for evaluating his performance?
A) The Treynor ratio.
B) The information ratio.
C) Jensen’s alpha.
Correct answer is B)
The information ratio is the manager’s excess return (relative to a benchmark return) divided by the standard deviation of excess returns. Because it measures risk and return relative to a benchmark, it would be the most appropriate measure when the minimization of tracking risk is important.
Q3. The Information ratio is also referred to as the benefit-cost ratio. What is cost defined as?
A) The standard deviation of benchmark returns.
B) The standard deviation of surplus returns.
C) The standard deviation of portfolio returns.
Correct answer is B)
The information ratio is calculated as the surplus return divided by the standard deviation of surplus returns. The cost in the information ratio is the standard deviation of surplus returns.
Q4. Which of the following measures would be the most appropriate one to use when comparing the results of two portfolios in which each portfolio contains many stocks from a broad selection of different industries?
A) Sharpe ratio.
B) Information ratio.
C) Treynor measure.
Correct answer is C)
The equations for the 3 measures are as follows:
Treynor measure = (RP ? RF) / βP
Sharpe ratio = (RP ? RF) / σP
Information ratio = (RP ? RB) / (σP ? B)
Since both portfolios are well diversified most of their risk comes from systematic risk or beta and is tied to the general level of overall risk in the market. In this case the best measure to use would be the Treynor measure since this uses beta or systematic risk as the measure of risk. The Sharpe ratio uses standard deviation as the measure of risk in the denominator and the information ratio is best to use when comparing a portfolio to a benchmark.
Q5. Which of the following measures would be the most appropriate one to use when comparing the results of two portfolios in which each portfolio contains only a few number of stocks representing a limited number of industries?
A) Sharpe ratio.
B) Treynor measure.
C) Information ratio.
Correct answer is A)
The equations for the 3 measures are as follows:
Sharpe ratio = (RP ? RF) / σP
Treynor measure = (RP ? RF) / βP
Information ratio = (RP ? RB) / (σP ? B)
Since both portfolios are not well diversified most of their risk comes from unsystematic (company specific) risk and is not tied to the overall level of risk in the market thus in this case standard deviation is the best measure of risk to use. The Sharpe ratio is the best measure to use to compare the two portfolios which are undiversified since the Sharpe ratio uses standard deviation or total risk in the denominator of the equation as its measure of risk. The Treynor measure uses beta or systematic market risk as the measure of risk in the denominator and the information ratio is best to use when comparing a portfolio to a benchmark.
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发表于 2009-4-10 14:54
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