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Worksheet 4 Q - Performance Measurement - Section A

This document contains a worksheet on performance measurement for investment strategy and portfolio management students. It includes 8 questions covering various performance measurement metrics such as Sharpe ratio, Treynor ratio, Jensen's alpha, information ratio, and duration-adjusted excess return. The questions provide sample portfolio return and risk data and ask students to calculate the relevant performance metrics and determine which portfolios outperformed based on these measures.

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42 views1 page

Worksheet 4 Q - Performance Measurement - Section A

This document contains a worksheet on performance measurement for investment strategy and portfolio management students. It includes 8 questions covering various performance measurement metrics such as Sharpe ratio, Treynor ratio, Jensen's alpha, information ratio, and duration-adjusted excess return. The questions provide sample portfolio return and risk data and ask students to calculate the relevant performance metrics and determine which portfolios outperformed based on these measures.

Uploaded by

mail.sinimola
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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BANGOR BUSINESS SCHOOL

Investment Strategy and Portfolio Management


Worksheet 4: Performance Measurement

1. Consider two fund managers who both achieved a return over one year of 10% on their
portfolios. Fund manager A’s portfolio had a standard deviation of 8%, while fund manager
B’s portfolio had a standard deviation of 9%. The risk-free rate of interest over this period was
4%.
(a) What are the Sharpe ratios for the portfolios? (b) Which portfolio performed better?

2. Consider again the two managers from question 1. The portfolio of manager A had a beta
value of 0.9, and the beta of manager B’s portfolio was 1.5.
(a) Which portfolio had lesser/greater systematic risk than the market?
(b) What are the Treynor measures for the two portfolios?
(c) Which portfolio represented better performance?

3. Suppose that the trustees of a pension fund decide that they wish their equity portfolio to
have a CAPM beta of 0.75 and instruct the manager of their equity portfolio to at least match
the performance of an equity portfolio with a CAPM beta of 0.75 over the next year.
The risk free rate of interest was 4% and the return on the market was 16%.
The fund manager actually achieved a return of 15% with a portfolio that had the required
CAPM beta.
(a) What was the required return of the benchmark portfolio?
(b) What was the Jensen measure for the fund manager’s portfolio?

4. Consider the same data as in Q3. Suppose that the total risk of the manager’s portfolio (σp)
was 0.30 and that the standard deviation of return on the market (σm) was 0.29.
(a) What is the β of a well-diversified portfolio with the same total risk as the
manager’s portfolio?
Hint: Well-diversified portfolio has correlation of 1 with the market.
(b) What is the Jensen measure of performance if this alternative value of β is used?

5. A fund manager’s portfolio has achieved a return of 12% over the last year. For the same
period, the risk-free rate was 4% and the return on the market index was 11%. The standard
deviation of returns on the portfolio was 25% and the standard deviation of returns on the
market index was 20%.
2
According to the Sharpe ratio and the M measure, did the portfolio outperform the market?

6. A fund manager’s portfolio has achieved a return of 14% over the last year. For the same
period, the risk-free rate was 5% and the return on the market index was 10.5%. The
standard deviation of returns on the portfolio was 23% and the standard deviation of returns
on the market index was 20%.
2
According to the Sharpe ratio and the M measure, did the portfolio outperform the market?

7. Over the past three years, using monthly data, the return on a fund has been 14.5% per
annum. The benchmark return over this period was 16% and the standard deviation of the
surplus was 12%.
(a) What is the information ratio for this fund? (b) What do you conclude from the result?

8. Consider two bond portfolios, A and B. Portfolio A achieved a return of 10% over the
previous year, with an average duration of 16 years. Portfolio B achieved a return of 8% with
an average duration of 8 years. The duration of the market portfolio of bonds was 8 years,
and the risk-free rate was 5%.
(a) What is the duration-adjusted excess return for each portfolio? (b) Which portfolio
performed best?

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