Reading 44: Evaluating Portfol....rmance－LOS d measures, interpret

tycoon

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 16: Performance Evaluation and Attribution
Reading 44: Global Performance Evaluation
LOS d: Contrast and interpret alternative measures of portfolio risk and risk-adjusted portfolio performance.

tycoon

Advanced quantitative models (AQM) global equity fund has averaged a return of 12.5 percent per year over the last 10 years. The benchmark average return over the same period was 11 percent per year. The risk-free rate of return during the same period averaged 3.50 percent. The standard deviation of the funds return is 16.15 percent, and the standard deviation of the surplus return is 10.50 percent.

What is the Information Ratio for the fund?

A) 1.05.

B) 0.14.

C) 1.19.

D) 0.86.

---

Answer and Explanation

Information Ratio = (12.50-11)/10.5 = 0.14

---

What is the Sharpe Ratio for the fund?

A) 0.56.

B) 0.14.

C) 1.19.

D) 0.86.

---

Answer and Explanation

Sharpe Ratio = (12.50-3.50)/16.15 = 0.56

tycoon

ABC fund earned a total return of 19.5 percent for calendar year 2003. Its benchmark return during the same period of time is 17.50 percent. The risk-free rate of return for the period was 2.0 percent. ABCs standard deviation is 16 percent and the standard deviation of the benchmark is 12 percent. Did the fund outperform its benchmark based on the Sharpe ratio?

A) No, the Sharpe ratio of the fund is 1.09 versus 1.29 for the benchmark.

B) Yes, the Sharpe ratio of the fund is 1.09 versus 1.29 for the benchmark.

C) Yes, the fund earned 2% above the benchmark return.

D) No, the Sharpe ratio of the fund is 1.29 versus 1.09 for the benchmark.

---

Answer and Explanation

Sharpe Ratio for the fund = (19.5-2)/16 = 1.09 Sharpe Ratio for the benchmark = (17.5-2)/12 = 1.29