Evaluation of Stock

Portfolio Performance
What is Required of a Portfolio Manager?
1.The ability to derive above-average returns for a given risk class
Superior risk-adjusted returns can be derived from either
superior timing or
superior security selection
2. The ability to diversify the portfolio completely to eliminate unsystematic risk
relative to the portfolios benchmark
The Treynor measure (T) relates the rate of return earned above the riskfree
rate to the portfolio beta during the period under consideration. Therefore, the
Treynor measure shows the risk premium (excess return) earned per unit of
systematic risk:
Ri- Rf
Ti =
i
where: Ri = average rate of return for portfolio i during the specified period
Rf = average rate of return on a riskfree investment during the
specified period
i = beta of portfolio i during the specified period.
The following portfolios are being considered for investment. During the period
under consideration, RFR = 0.07.
Portfol ReturnBeta
io
P
0.15 1.0
SD
0.20
1.5
0.10
0.10
0.6
0.03
Market 0.13
1.0
0.04
0.05
a. Compute the Treynor measure for each portfolio and the market portfolio.
b. Rank the portfolios
Portfolio
Treynor
Market
The Sharpe measure (S) relates the rate of return earned above the risk
free rate to the total risk of a portfolio by including the standard deviation of
returns. Therefore, the Sharpe measure indicates the risk premium (excess
return) per unit of total risk:
Ri Rf
S=
i
where: Ri = average rate of return for portfolio i during the specified period
Rf = average rate of return on a riskfree investment during the
specified period
i = standard deviation of the rate of return for portfolio i during the
specified period.
Portfo Avera Stand
lio
ge
ard
Annu Devia
al
tion of
Retur Retur
n
n
D
0.13 0.18
E
0.17 0.22
F
0.16 0.23
Marke 0.14 0.20
t
Risk Free Rate of Return is 0.08
The D portfolio had the lowest risk premium return per unit of total risk,
failing even to perform as well as the aggregate market portfolio. In
contrast, Portfolio E and F performed better than the aggregate market:
Portfolio E did better than Portfolio F.
The following portfolios are being considered for investment. During the period
under consideration, RFR = 0.07.
Portfol ReturnBeta
io
P
0.15 1.0
SD
0.20
1.5
0.10
0.10
0.6
0.03
Market 0.13
1.0
0.04
0.05
a. Compute the Sharpe measure for each portfolio and the market portfolio.
b. Rank the portfolios
Portfolio
Sharpe
Market
Treynor versus Sharpe Measure
Sharpe uses standard deviation of returns as the measure of risk
Treynor measure uses beta (systematic risk)
Sharpe therefore evaluates the portfolio manager on the basis of both rate of
return performance and diversification
The methods agree on rankings of completely diversified portfolios
An analyst wants to evaluate Portfolio X, consisting entirely of U.S. common
stocks, using both the Treynor and Sharpe measures of portfolio
performance. The following table provides the average annual rate of return
for Portfolio X, the market portfolio (as measured by the Standard and Poors
500 Index), and U.S. Treasury bills (T-bills) during the past eight years.
Annual Standa Beta

Averag rd
e Rate Deviati
of
on
Return of
Return
Portfoli 10% 18% 0.60
oX
S&P 12
13
1.00
500
T-bills 6
n/a
n/a
a. Calculate both the Treynor measure and the Sharpe measure for both Portfolio
X and the S&P 500. Briefly explain whether Portfolio X under performed,
equaled, or outperformed the S&P 500 on a risk-adjusted basis using both the
Treynor measure and the Sharpe measure.
b. Based on the performance of Portfolio X relative to the S&P 500 calculated in
Part a, briefly explain the reason for the conflicting results when using the
Treynor measure versus the Sharpe measure.
Treynor Measure
Performance Relative to the

Market (S&P 500)
10% - 6%
T=
= 6.7%
0.60
Market (S&P 500)
12% - 6%
TM =
= 6.0%
1.00
Outperformed
Sharpe Measure
Performance Relative to the

Market (S&P 500)
10% - 6%
S=
= 0.222%
18%
Market (S&P 500)
12% - 6%
SM=
= 0.462%
13%
Underperformed
The Treynor measure assumes that the appropriate risk measure for a portfolio
is its systematic risk, or beta. Hence, the Treynor measure implicitly assumes
that the portfolio being measured is fully diversified. The Sharpe measure is
similar to the Treynor measure except that the excess return on a portfolio is
divided by the standard deviation of the portfolio.
For perfectly diversified portfolios (that is, those without any unsystematic
or specific risk), the Treynor and Sharpe measures would give consistent
results relative to the market index because the total variance of the
portfolio would be the same as its systematic variance (beta). A poorly
diversified portfolio could show better performance relative to the market if
the Treynor measure is used but lower performance relative to the market
if the Sharpe measure is used. Any difference between the two measures
relative to the markets would come directly from a difference in
diversification.
In particular, Portfolio X outperformed the market if measured by the Treynor
measure but did not perform as well as the market using the Sharpe
measure. The reason is that Portfolio X has a large amount of unsystematic
risk. Such risk is not a factor in determining the value of the Treynor
measure for the portfolio, because the Treynor measure considers only
systematic risk. The Sharpe measure, however, considers total risk (that is,
both systematic and unsystematic risk). Portfolio X, which has a low amount
of systematic risk, could have a high amount of total risk, because of its lack
of diversification. Hence, Portfolio X would have a high Treynor measure
(because of low systematic risk) and a low Sharpe measure (because of
high total risk).
The Information Ratio
You have just gathered the following performance data for three different money
managers, based on a regression of their excess returns relative to those for
the KSE 100 index. Each managers performance was measured over the
same three-year period, but the return period for each was different.
Mana Alph Bet Std.

ger a
a Error
of
Regre
ssion
A
0.058 0.950.533
%
%
B
0.115 1.125.884
C
Retur
n
Perio
d
Week
ly
Biwe
ekly
0.250 0.782.165 Mont
a. Calculate the information ratio for each manager, ignoring the difference
in return reporting periods.
b. Calculate the annualized information ratio for each manager.
c. Rank the managers performance according to your answers in Parts a
and b. Which manager performed the best? Explain.
(a). (Information ratio) IRj = j/u
where
u = standard error of the regression
IRA = .058/.533 = 0.1088
IRB = .115/5.884 = 0.0195
IRC = .250/2.165 = 0.1155
(b). Annualized IR = (T)1/2(IR)
Annualized IRA = (52)1/2(0.1088) = 0.7846
Annualized IRB = (26)1/2(0.0195) = 0.0994
Annualized IRC = (12)1/2(0.1155) = 0.4001
(c). The higher the ratio, the better. Based upon the answers to part a,
Manager C would be rated the highest followed by Managers A and B,
respectively. However, once the values are annualized, the ranking change.
Specifically, based upon the annualized IR, Manger A is rated the highest,
followed by C and B. (In both cases, Manager C is rated last). Based upon the
Grinold-Kahn standard for good performance (0.500 or greater), only Manager
A meets that test.
Consider the following historical performance data for two different
portfolios, the Standard and
Poors 500, and the 90-day T-bill.
Avera
ge
Invest Rate Standar
ment
of
d
Vehicl Retur Deviatio Bet
e
n
n a R2
Fund 1 26.40
1.3 0.7
% 20.67% 51 51
Fund 2
13.22
14.2 1 $1
S&P
500
15.71 13.25
90-day
T-bill
6.2
0.5
a.Calculate the Fama overall performance measure for both funds.

b. What is the return to risk for both funds?
c. For both funds, compute the measures of (1) selectivity, (2)
diversification, and (3) net selectivity.
d. Explain the meaning of the net selectivity measure and how it helps you
evaluate investor performance. Which fund had the best performance?
Consider the following performance data for two portfolio managers (A
and B) and a common benchmark portfolio:
BE
NC
HM
AR
K
MAN
AGE
RA
MAN
AGE
RB
WR
ei et
Wei Retur Weig Ret gh ur
ght
n ht urn t n
St
5.
oc
4.0 0. 0
k 0.60 5.0% 0.50 % 30 %
Bo
nd
2.5 . 3.
a.Calculate: (1) the overall return to the benchmark portfolio; (2) the overall
return to Manager As actual portfolio; and (3) the overall return to Manager Bs
actual portfolio. Briefly comment on whether these managers have under- or
outperformed the benchmark fund.
b. Using attribution analysis, calculate (1) the selection effect for Manager
A, and (3) the allocation effect for Manager B. Using these numbers in
conjunction with your results from Part a, comment on whether these managers
have added value through their selection skills, their allocation skills, or both.
. For each of the last six quarters, Managers L and M have provided you with
the total dollar value of the funds they manage, along with the quarterly
contributions or withdrawals made by their clients.
(Note: Contributions are indicated by positive numbers, withdrawals by
negative numbers.)
MANA
GER
L
Total Cont
Funds ributi
Under ons/
Qu Mana With
art geme draw
er nt
als
Init $500,
ial 000
527,0
1
00
530,0
2
00
555,0
3
00
MANAG
ER M
Cont
Total
ributi
Funds ons/
Under With
Manage draw
ment
als
$700,00
0
12,0
35,0
00 692,000 00
7,50
35,0
0 663,000 00
13,5
35,0
00 621,000 00
For each manager, calculate:

a. her dollar-weighted return;
b. her time-weighted return; and
c. estimates of her quarterly performance returns using the Dietz
approximation method, assuming contributions/withdrawals are made exactly
halfway through the quarter.
Suppose ABC Mutual fund had no liabilities and owned only four stocks as
follows:
1,000
Market
Price Value
$12,00
$12
0
1,200
15 18,000
1,500
22 33,000
800
16 12,800
$75,80
0
Stock Shares
The fund began by selling $50,000 of stock at $8.00 per share. What is its
NAV?
Suppose you are considering investing $1,000 in a load fund that charges
a fee of 8 percent, and you expect your investment to earn 15 percent
over the next year. Alternatively, you could invest in a noload fund with
similar risk that charges a 1 percent redemption fee. You estimate that
this no-load fund will earn 12 percent. Given your expectations, which is
the better investment and by how much?
Suppose that at the start of the year, a no-load mutual fund has a net asset
value of $27.15 per share. During the year, it pays its shareholders a capital
gain and dividend distribution of $1.12 per share and finishes the year with an
NAV of $30.34.
a. What is the return to an investor who holds 257.876 shares of this fund in
his (nontaxable) retirement account?
b. What is the after-tax return for the same investor if these shares were held
in an ordinary savings account? Assume that the investor is in the 30 percent
tax bracket.
c. If the investment company allowed the investor to automatically reinvest his

cash distribution in additional fund shares, how many additional shares could
the investor acquire? Assume that the distribution occurred at year end and
that the proceeds from the distribution can be reinvested at the year-end NAV.
The Focus Fund is a mutual fund that holds long-term positions in a small
number of non dividend paying stocks. Their holdings at the end of two recent
years are as follows:
Ye
ar
1
Year
2
St
oc Sh Pric Shar Pric
k are
e
e e
10
0,0 $45. 100,0 $48.
A 00 25
00 75
22
5,0 25.3 225,0 24.7
B 00
8
00 5
37
5,0
375,0 12.3
C 00 14.5
00 8
11
5,0 87.1 115,0
D 00
3
0098.5
15
At the end of both years, Focus Fund had 5,430,000 shares outstanding.
a. Calculate the net asset value for a share of the Focus Fund at the end of
Year 1, being sure to
include the cash position in the net total portfolio value.
b. Immediately after calculating its Year 1 NAV, Focus Fund sold its position in
Stock L and purchased its position in Stock M (both transactions were done at
Year 1 prices). Calculate the Year 2 NAV for Focus Fund and compute the
growth rate in the fund share value on a percentage basis.
c. At the end of Year 2, how many fund shares of the Focus Fund could the
manager redeem without having to liquidate her stock positions (i.e., using
only the cash account)?
d. If immediately after calculating the Year 2 NAV the manager received
investor redemption requests for 500,000 shares, how many shares of each
stock would she have to sell in order to maintain the same proportional
ownership position in each stock? Assume that she liquidates the entire cash
position before she sells any stock holdings
You have been asked to evaluate the investment performance of three
different professional asset managers relative to each other and to the
Standard and Poors 500 index. After gathering quarterly return data over the
past five years, you compute the following statistics:
Diver
Average
sificati
Portfo
Annual
on
lio
Return Beta Level
A
10.20% 0.82 86%
15.4 1.36
63
13.2 0.99
98
S&P
13.3
100
a. Based on this data, can you conclude that Manager A underperformed the
market and Manager B outperformed the market? Why or why not?
b. What additional information do you think you would require in order to perform
a compelling analysis of the investment performance of these managers?
c. What was the most likely investment objective followed by Portfolio Manager
C? By Manager A?
d. What might explain the fact that Manager Bs portfolio is so much less
diversified than those run by Managers A and C?

Evaluation of Stock

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Evaluation of Stock

Transféré par

Droits d'auteur :

Formats disponibles

Portfolio Performance

Annual Standa Beta

Performance Relative to the

Performance Relative to the

Mana Alph Bet Std.

a.Calculate the Fama overall performance measure for both funds.

For each manager, calculate:

c. If the investment company allowed the investor to automatically reinvest his

10.20% 0.82 86%

Vous aimerez peut-être aussi