tycoon

Which of the following statements about risk/return investment manager performance measures is FALSE?

A) When measuring the performance of an equity fund, if the Sharpe ratio is 0.55, and the Treynor measure is 0.47, the difference is attributable to unsystematic (company-specific) risk.

B) The Treynor measure includes company-specific risk as part of its performance measurement.

C) The Sharpe measure includes company-specific risk as part of its performance measurement.

D) Jensen's Alpha measures equity fund performance relative to what the portfolio would have returned had it been on the security market line (SML).

---

Answer and Explanation

The Treynor measure does not include company-specific risk, it uses beta in the denominator, which only measures systematic risk. Note that the Sharpe measure uses standard deviation in its denominator, which is a measure of total risk.

The Treynor measure does not include company-specific risk, it uses beta in the denominator, which only measures systematic risk. Note that the Sharpe measure uses standard deviation in its denominator, which is a measure of total risk.

tycoon

 

An analyst has generated the following information about risk/return performance using the Sharpe ratio and the Treynor measure:

An analyst has generated the following information about risk/return performance using the Sharpe ratio and the Treynor measure:

                                                            Equity Fund         S& 500

                           Sharpe ratio                     0.47                  0.42

                           Treynor measure              0.31                  0.34

Which of the following statements about the relative risk/return performance of the funds is TRUE?  The:

Which of the following statements about the relative risk/return performance of the funds is TRUE?  The:

A) Treynor measure shows the fund outperformed the S& 500 on a systematic risk-adjusted basis.

B) Sharpe ratio shows the equity fund underperformed the S& 500 on a systematic risk-adjusted basis.

C) Treynor measure shows the fund underperformed the S& 500 on a total risk-adjusted basis.

D) Sharpe ratio shows the equity fund outperformed the S& 500 on a total risk- adjusted basis.

---

Answer and Explanation

With either the Sharpe or Treynor methodology, a higher number means a higher risk-adjusted return. Since the Sharpe ratio is 0.05 higher, it outperformed the S& 500. Note that the key difference between the Sharpe and Treynor measures is that the Sharpe ratio measures return per unit of total risk, while Treynor measures return per unit of systematic risk.

With either the Sharpe or Treynor methodology, a higher number means a higher risk-adjusted return. Since the Sharpe ratio is 0.05 higher, it outperformed the S& 500. Note that the key difference between the Sharpe and Treynor measures is that the Sharpe ratio measures return per unit of total risk, while Treynor measures return per unit of systematic risk.

tycoon

 

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.   Using Jensens Alpha to measure the risk/return performance of the Equity fund and the S& 500, which of the following conclusions is TRUE?  The:

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.   Using Jensens Alpha to measure the risk/return performance of the Equity fund and the S& 500, which of the following conclusions is TRUE?  The:

                                                         Equity Fund            S& 500

                   Return                                  23%                     27%           

                   Standard Deviation                15%                     19%

                   Beta                                   1.09                    1.00

                   Risk-free rate is 3.50%

A) S& 500 outperformed the equity fund by 3.24%.

B) S& 500 underperformed the equity fund by 2.67%.

C) Equity fund outperformed the S& 500 by 5.04%.

D) Equity fund underperformed the S& 500 by 6.12%.

---

Answer and Explanation

Jensens Alpha: 0.23 [0.035 + (0.27 0.035)1.09] = -0.0612 or -6.12%. The negative means it underperformed the S& 500.

Jensens Alpha: 0.23 [0.035 + (0.27 0.035)1.09] = -0.0612 or -6.12%. The negative means it underperformed the S&P 500.

tycoon

Which of the following statements about fund performance is TRUE?

A) 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.

B) 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.

C) An investment style focusing on small capitalization stocks is likely to result in a portfolio with a low beta.

D) 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%.

---

Answer and Explanation

The Sharpe ratio = (0.17 0.03)/).12 = 1.17.

Note that focusing on maturity ranges or a particular market segment are definitions of style for a bond portfolio manager. Also, an investment style focusing on small capitalization stocks is likely to result in a portfolio with a higher beta and a lower dividend yield. Further, managers whose styles are specified for them should only get credit for the excess return that is due to security selection.

Note that focusing on maturity ranges or a particular market segment are definitions of style for a bond portfolio manager. Also, an investment style focusing on small capitalization stocks is likely to result in a portfolio with a higher beta and a lower dividend yield. Further, managers whose styles are specified for them should only get credit for the excess return that is due to security selection.

The Sharpe ratio = (0.17 0.03)/).12 = 1.17.

Note that focusing on maturity ranges or a particular market segment are definitions of style for a bond portfolio manager. Also, an investment style focusing on small capitalization stocks is likely to result in a portfolio with a higher beta and a lower dividend yield. Further, managers whose styles are specified for them should only get credit for the excess return that is due to security selection.

Note that focusing on maturity ranges or a particular market segment are definitions of style for a bond portfolio manager. Also, an investment style focusing on small capitalization stocks is likely to result in a portfolio with a higher beta and a lower dividend yield. Further, managers whose styles are specified for them should only get credit for the excess return that is due to security selection.

tycoon

 

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.

Equity Fund S& 500

Return 32% 26%

Standard Deviation 41% 29%

Beta 0.98 1.00

Risk-free rate is 6.00%

The difference between the Sharpe ratio for the equity fund and the Sharpe ratio for the S& 500 is the:

The difference between the Sharpe ratio for the equity fund and the Sharpe ratio for the S& 500 is the:

A) S& 500 is 0.09 higher.

B) equity fund is 0.06 lower.

C) S& 500 is 0.04 lower.

D) equity fund is 0.51 higher.

---

Answer and Explanation

The equity fund Sharpe ratio: (0.32 0.06)/0.41 = 0.63

The S& 500 Sharpe ratio: (0.26 0.06)/0.29 = 0.69

The equity fund is (0.63 0.69) = -0.06 lower

The equity fund Sharpe ratio: (0.32 0.06)/0.41 = 0.63

The S& 500 Sharpe ratio: (0.26 0.06)/0.29 = 0.69

The equity fund is (0.63 0.69) = -0.06 lower

tycoon

 

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.

Equity Fund S& 500

Return -12% -16%

Standard Deviation 15% 19%

Beta 1.18 1.00

Risk-free rate is 6.00%

The difference between the Treynor measure for the equity fund and the Treynor measure for the S& 500 is:

The difference between the Treynor measure for the equity fund and the Treynor measure for the S& 500 is:

A) 0.17.

B) 0.07.

C) 0.15.

D) 0.21.

---

Answer and Explanation

The equity fund: (-0.12 0.06)/1.18 = -0.15

The S& 500: (-0.16 0.06)/1.00 = -0.22

The equity fund is (-0.15 (-0.22) = 0.07 higher

The equity fund: (-0.12 0.06)/1.18 = -0.15

The S& 500: (-0.16 0.06)/1.00 = -0.22

The equity fund is (-0.15 (-0.22) = 0.07 higher

tycoon

 

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.  

                                                               Equity Fund                 S& 500

               Return                                            13%                          10.5%              

               Standard Deviation                           22%                          20%

               Beta                                             1.21                          1.00

               Risk-free rate is 5.25%

The Treynor measure for the equity fund is:

A) 0.064.

B) 0.570.

C) 0.048.

D) 0.071.

---

Answer and Explanation

(0.13 0.0525)/1.21 = 0.064.

(0.13 0.0525)/1.21 = 0.064.

tycoon

 

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.  

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.  

                                                      Equity Fund            S& 500

                  Return                                  27%                   29%        

                  Standard Deviation                33%                    20%

                  Beta                                    0.95                   1.00

                  Risk-free rate is 4.00%

The Treynor measure and the Sharpe ratio, in that order, for the S& 500 are:

A) 0.18 and 1.11.

B) 0.25 and 1.25.

C) 0.56 and 1.01.

D) 0.33 and 0.97.

---

Answer and Explanation

Treynor measure: (0.29 0.04)/1.00 = 0.25

Sharpe ratio: (0.29 0.04)/0.20 = 1.25

Sharpe ratio: (0.29 0.04)/0.20 = 1.25

Treynor measure: (0.29 0.04)/1.00 = 0.25

Sharpe ratio: (0.29 0.04)/0.20 = 1.25

Sharpe ratio: (0.29 0.04)/0.20 = 1.25

tycoon

 

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.  

An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.  

                                                         Equity Fund            S& 500

                           Return                             21%                  24%           

                           Standard Deviation            19%                  17%

                           Beta                              1.05                    1.00

                           Risk-free rate is 4.50%

The Sharpe ratio for the equity fund is:

A) 0.76.

B) 0.87.

C) 0.98.

D) 0.84.

---

Answer and Explanation

(0.21 0.045)/0.19 = 0.87.

(0.21 0.045)/0.19 = 0.87.

tycoon

Which of the following measures used to evaluate the performance of a portfolio manager is/are NOT subject to the assumptions of the capital asset pricing model (CAPM)?

A) Jensen's alpha.

B) Treynor measure.

C) Sharpe measure.

D) Jensen's alpha and the Treynor measure.

---

Answer and Explanation

Both the Treynor measure and the Jensen's alpha assume that the CAPM is the underlying risk-adjustment model. The Sharpe measure on the other hand does not make this assumption. It uses total risk of a portfolio, unlike the Treynor measure and Jensen's alpha, which use the systematic (undiversifiable) risk as measured by beta to compute the risk-adjusted return of a portfolio.