Performance Measurement Q particular, comparing, determine, addition, adjusted

burning0spear

A portfolio manager has a well diversified portfolio and they are trying to determine whether or not to add a particular stock to the portfolio to increase the portfolio’s overall risk adjusted return. To decide whether or not to add the stock the manager will back test the portfolio based on historical data of the stock and the portfolio. The relevant measure to use in comparing the results of the back tested model comparing the results of the portfolio before and after the addition of the stock would be the:
A)
Sharpe ratio.
B)
Treynor measure.
C)
Information ratio.

iteracom

Given the usual way is to take
Is SR (Asset being added) > SR (Portfolio) * Correlation (Asset, Portfolio)
I am inclined to go with SR (Sharpe Ratio) - choice A.
C). Information Ratio = Active Return / Active Risk -> not applicable in this situation.
B) Treynor measure = (Rp - Rf) / Betap -> not applicable.

strikethree

Typically opaque question , but I am going to assume “overall” means “total” , so A , Sharpe Ratio

Viceroy

Agreed, I would say choice A for the same reason cpk mentioned. The traditional way to see if it’s worth adding a stock to a portfolio is to compare the Sharpe ratio of the asset being added to the Sharpe ratio of the existing portfolio (multiplied by its correlation to the stock). So Sharpe Ratio is most relevant.
Info ratio isn’t relevant in my opinion, agreed with cpk.
I forget what the Treynor measure is.

liquidity

Official ans from Qbank
The goal is to add a greater return to the portfolio without appreciably increasing the level of risk. Since the portfolio is already well diversified most of its risk is related to systematic risk (beta) which is the relevant measure of risk in the denominator of the Treynor measure. Adding one risky stock to an already diversified portfolio will not appreciably change the overall risk of the portfolio thus beta and the Treynor measure remain the relevant measures used to compare the results of the portfolio with and without the addition of the stock. The Sharpe ratio uses standard deviation in the denominator of the equation. Standard deviation is comprised of systematic risk (beta) and unsystematic risk. If the portfolio was not well diversified then most of the risk would be unsystematic or company specific risk. Adding one stock to an undiversified portfolio would most likely still leave a lot of unsystematic risk thus making standard deviation and the Sharpe ratio the relevant measures if the portfolio was undiversified. The information ratio is used to compare the return to a benchmark which is not a concern to the portfolio manager in this question.
I think I need a good/long break. Good luck forks, see you tomorrow with a fresh mind.

RMontgomery

not sure where Schweese is doing its squeezing from.
I don’t recall where in the curriculum they talk about using Treynor to ever add Asset A to Portfolio B.
They do talk of Sharpe for that.
Are they saying
Treynor Portfolio < Treynor Asset -> go ahead and add…. need to see curriculum confirmation for that anywhere.

cfalevel2011

the same thing could have been said with using Sharpe Portfolio * Correlation (Asset,Portfolio) < Sharpe Asset.
Can you give me the question id please?

pawn

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)
Treynor measure.
B)
Information ratio.
C)
Sharpe ratio.

Palantir

Hahah well after that nice explanation you gave, I’m gonna say C is the right answer for this one.

brain_wash_your

Question ID#: 100904