Using the following information from a firm that uses enterprise risk management, which portfolio manager has superior performance and why? | Manager A | Manager B | Capital | $150,000,000 | $590,000,000 | VAR | $7,500,000 | $21,000,000 | Profit | $2,000,000 | $7,000,000 |
| A) | Manager A because they had a higher return on capital. |
| | B) | Manager A because they used less VAR. |
| | C) | Manager B because they had a higher profit. |
| D) | Manager B because their return is higher in a risk budgeting context. |
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Answer and Explanation
Using risk budgeting in enterprise risk management, we would divide the profit by the VAR allowed to generate a risk-adjusted performance measure. For manager A it is 26.7% (2,000,000/7,500,000). For Manager B it is 33.3% (7,000,000/21,000,000). Thus Manager B has better risk-adjusted performance. Note that the return on capital for each manager tells a different story. For manager A it is 1.3% (2,000,000/150,000,000) and it is 1.2% (7,000,000/590,000,000) for Manager B. So although the percentage return generated is higher for Manager A, we would conclude that Manager B has better performance when risk is considered.
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发表于 2008-9-17 18:19
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