likaiba

 

2、Jenny Rouse has been a portfolio manager for Theta Advisors for the last five years. The performance of her portfolio has had few returns below its benchmarks since its inception. Which of the following risk measures best measures Rouse’s performance?

A) Standard Deviation.

B) Range.

C) Sharpe ratio.

D) Sortino ratio. 

likaiba

 

The correct answer is D

The Sortino ratio examines the downside risk of returns. It is calculated as the portfolio return minus the minimum acceptable return (MAR) divided by a standard deviation that only uses returns below the MAR. It is similar to the target semivariance. Since Rouse’s portfolio has had consistently higher returns, she should not be penalized for any variability on the upside. The range (the difference between the highest and lowest values), standard deviation, and Sharpe ratio (which uses the standard deviation in the denominator) examine all returns, whether they correspond to positive or negative alphas. The use of these measures would result in risk measurements that are unfairly high in Rouse’s case.

likaiba

 

28、Portfolios X and Y have had an equal average return over the most recent period. Compared to Portfolio Y, Portfolio X had higher total risk, but lower systematic risk. Given this information, which of the following statements is TRUE? Compared to Portfolio Y:

A) Portfolio X has a higher Sharpe ratio and a lower Treynor ratio.

B) Portfolio X has both a lower Sharpe ratio and a lower Treynor ratio.

C) Portfolio X has a lower Sharpe ratio and a higher Treynor ratio.

D) Portfolio X has both a higher Sharpe and a higher Treynor ratio.

likaiba

 

The correct answer is C

The two portfolios will have the same numerator for both the Sharpe and the Treynor ratio. Thus, the denominator of the two measures will determine their relative sizes. The Sharpe measure has the standard deviation or total risk in the denominator, thus the value will be lower for X. Since X has lower systematic risk, its denominator in the Treynor measure will be lower and the overall measure will be higher for X.

 

likaiba

 

AIM 5: Discuss extensions to Jensen’s alpha.

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 Jensen’s 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)  Equity fund underperformed the S& 500 by 6.12%.

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

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

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

likaiba

 

The correct answer is A

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

 

likaiba

 

26、

	Sharpe Measure	Treynor Measure	Jensen Measure
Portfolio A	0.25	0.12	0.04
Portfolio B	0.65	0.09	0.03
Portfolio C	0.45	0.11	0.02
Portfolio D	0.75	0.10	-0.02

The table represents risk-adjusted returns across all fund categories. Which of the following represents the best risk-adjusted return?

A)  Portfolio B.

B)  Portfolio C.

C)  Portfolio A.

D)  Portfolio D.

likaiba

 

The correct answer is D

The Sharpe measure should be used since all funds are considered. Portfolio D should be selected because it has the highest Sharpe measure.

 

likaiba

 

27、The Treynor and Sharpe ratios will:

A) give identical rankings when the assets have identical standard deviations.

B) give identical rankings when the same minimum acceptable return is chosen for the calculations.

C) give identical rankings when the assets have identical correlations with the market.

D) always provide identical rankings.

likaiba

 

The correct answer is C

The Treynor and Sharpe ratios will provide the same ranking for two assets that have identical correlations with the market. While Treynor uses beta to measure risk and Sharpe uses standard deviation, we can decompose the beta of a security into its correlation and standard deviation components such that equal correlations will yield identical calculations for the Sharpe and Treynor ratios.