Reading 47: Evaluating Portfolio Performance Los p~Q8-16

available, following, details, period

Q8. The following details are available for the Prime Growth Fund, S& 500, and U.S. Treasury Bills (T-bills) for the 5-year period from 1995 to 2000.

	Prime Growth	S& 500	T-bill
Average annual rate of return	12.00%	9.50%	3.00%
Standard deviation of returns	22%	14%
Beta	1.12

What is the Sharpe ratio for the Prime Growth Fund and for the S& 500?

A) 0.64; 0.29.

B) 0.41; 0.46.

C) 1.12; 1.00.

Q9. What is the Treynor measure for the Prime Growth Fund and the S& 500?

A) 0.08; 0.07.

B) 0.64; 0.29.

C) 8.04; 4.91.

Q10. Peter Michaels, CFA, works at Composite Investment Management Consulting (Composite), where he is in charge of evaluating the performance of all separate account managers that Composite uses for its institutional clientele. His main tasks are to measure and evaluate the sources of return that can be attributed to manager performance. Michaels understands the importance of incorporating risk into his analyses, but realizes there are limitations associated with some performance measurement techniques in accomplishing that particular objective.

Currently Michaels is working on an evaluation of the AMG large capitalization growth fund and has assembled the following one-year return information.

	AMG Fund	S& 500
Return	14%	12%
Standard Deviation	25%	18%
Beta	1.15	1.00
Risk-Free Rate	4%	4%

The Sharpe and Treynor ratios, respectively, for the AM Growth Fund are:

A) -0.44 and -0.10.

B) 0.40 and 0.09.

C) 0.08 and 0.02.

Q11. If the AM Growth Fund is considered a focused, undiversified portfolio, which measure would be more appropriate in evaluating its risk/return performance?

A) The Treynor measure.

B) The Sharpe ratio.

C) Jensen's Alpha measure.

Q12. The following data has been collected to appraise the performance of four asset management firms:

	Dixon Fund	Adams Fund	Bould Fund	Winterburn Fund	Market Index
Return	5.12%	7.68%	8.00%	4.80%	6.4%
Beta	0.95	1.08	1.40	0.80	1.00
Variance	14.05	15.50	20.25	9.20	12.25

The risk free rate of return is 4%.

Using the Treynor measure, rank the four funds in terms of the risk adjusted excess returns starting with the highest performing fund and ending with the lowest performing fund:

A) Adams, Bould, Winterburn, Dixon.

B) Bould, Adams, Dixon, Winterburn.

C) Adams, Bould, Dixon, Winterburn.

Q13. Using the M² Measure, rank the four funds in terms of the risk adjusted excess returns starting with the highest performing fund and ending with the lowest performing fund:

A) Adams, Dixon, Winterburn, Bould.

B) Adams, Bould, Dixon, Winterburn.

C) Bould, Adams, Dixon, Winterburn.

Q14. Using the Sharpe Measure, rank the four funds in terms of the risk-adjusted excess returns starting with the highest performing fund and ending with the lowest performing fund:

A) Adams, Bould, Winterburn, Dixon.

B) Adams, Bould, Dixon, Winterburn.

C) Bould, Adams, Dixon, Winterburn.

Q15. Markus Smith, CFA, is looking at different measures of risk for bond portfolios as well as stock and bond mutual funds. He has several projects currently underway.

Smith’s first project is to decompose the various sources of return for the BBB Bond Fund (BBB) which yielded a return of 12%. The actual treasury yield was 8%, which is 1.0% better than the expected yield of 7.0%. In addition, Smith has ascertained that the BBB portfolio benefited by 0.50% due to maturity management and 1.25% from spread/quality management.

Smith’s second project involves AAA Bond Fund (AAA). Smith gathers the following data:

Actual AAA portfolio return = 10% (duration of portfolio = 10 years).
Lehman Brothers Benchmark Index return = 8% (duration of portfolio = 8 years).
According to the bond market line (BML), the return for a portfolio with a10-year duration should be 9%.
The AAA Bond Fund's long-term strategic portfolio has a duration of 9 years, and a target return of 8.5%.

Smith now turns his attention towards his third project, Star Equity Fund. The table below details relevant information: