Reading 47: Evaluating Portfolio Performance Los p~Q1-7

name, including, following, total, statements

LOS p: Calculate, interpret, and contrast alternative risk-adjusted performance measures, including (in their ex post forms) alpha, information ratio, Treynor measure, Sharpe ratio, and M².

Q1. Which of the following statements about fund performance is TRUE?

A) 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%.

B) 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.

C) 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.

Q2. Lee Hill, CFA, is evaluating three portfolio managers that he is considering adding to his consulting firm’s select list. The risk-free rate is 5%.

Portfolio Manager	Return	Beta	Standard Deviation
A	0.13	0.75	0.06
B	0.17	0.85	0.11
C	0.08	1.20	0.01

If Hill uses the Sharpe measure as his chosen performance measure, which portfolio would he add?

A) Manager A.

B) Manager C.

C) Manager B.

Q3. Robert Meznar is currently employed as a senior software architect in a large established software company. He is 38 years old, and his current salary is $80,000 after tax. Meznar recently sold his stock (acquired through stock options) in an Internet start up company. The entire proceeds of $2 million is held in treasury securities.

Meznar is currently married with 3 children. He is concerned with the potential educational expenses of his children and wants to set aside $500,000 for his favorite charitable organization. The family needs $150,000 to maintain its current lifestyle. The expected inflation rate is 6% and Meznar pays a 20% tax rate on his investment income. Meznar does some investment research on his own, is confident, careful and methodical, and tries to avoid extreme volatility. However, he has a strong preference for good, brand name companies.

John Snow, CFA, of Capital Associates has been forwarded the file of Meznar to suggest an appropriate portfolio. Snow relies heavily on the following forecasts, furnished by the firm, for long term returns for different asset classes. He has already developed three possible portfolios for Meznar.

Asset Class	Return	Standard Deviation	X	Y	Z
U.S. Stock	12.0%	16%	40%	30%	25%
Non U.S. Stocks	14.0	24%	0	15	25%
U.S. Corporate bonds	7.0	10%	60	15	0
Municipal Bonds	5.0	8%	0	20	25
REIT	14	14%	0	20	25

Assume the expected standard deviation of X, Y, and Z are 10.74%, 19%, and 22% respectively. If the risk free rate is 5%, what are the Sharpe ratio measures of portfolio X, Y and Z?

A) X Y Z

3.46 1.52 1.09

B) X Y Z

0.37 0.29 0.28

C) X Y Z

0.83 0.55 0.46

Q4. If a portfolio had an alpha of ?10 bps, then the portfolio:

A) earned 10 bps less than the market.

B) had less risk than the market.

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

Q5. Which of the following risk measures is NOT dependent on capital asset pricing model (CAPM)?

A) Neither of these.

B) Sharpe measure.

C) Jensen measure.

Q6. The following information is available for the Trumark Fund:

The Trumark Fund has an average annual return of 12% over the last five years.
Trumark has a beta value of 1.35.
Trumark has a standard deviation of returns of 16.80%.
During the same time period, the average annual T-bill rate was 4.5%.
During the same time period, the average annual return on the S& 500 portfolio was 18%.