Performance evaluation allows us to assess the performance of fund managers going beyond historical returns. In particular, we recognize that risk is an important factor when assessing the performance of fund managers and hence it should be taken into account when evaluating fund managers. However, there are many measures used to assess this risk-adjusted performance. (a) While the Sharpe and Treynor indices can be used to assess investment performance, these two measures sometimes provide conflicting results. Discuss why conflicting results can occur. (1 mark) (b) Cindy believes that the Sharpe and Treynor indices will provide similar results for a fund that is well diversified. Do you agree with Cindy? Why? (1 mark) c) Cindy has performed a time-series regression analysis on the portfolio p using the Fama-French three-factor model. The following shows her regression result: Ry Rp = 0.15 + 0.15 (Rm Rp) + 0.40 X SMB 0.25 X HML + Ep Cindy's result indicates that the portfolio's Jensen's alpha is (1 mark) (d) The table below shows Cindy's investment performance and the benchmark portfolio. Benchmark Cindy Weight Return Weight Return Stock 0.40 5.20% 0.30 6.00% Bonds 0.25 1.20% 0.50 1.50% Cash 0.35 0.80% 0.20 1.10% According to the table, the return that can be attributable to Cindy's securities selection skills is 9 and asset allocation skills is _%, respectively. (2 marks) Performance evaluation allows us to assess the performance of fund managers going beyond historical returns. In particular, we recognize that risk is an important factor when assessing the performance of fund managers and hence it should be taken into account when evaluating fund managers. However, there are many measures used to assess this risk-adjusted performance. (a) While the Sharpe and Treynor indices can be used to assess investment performance, these two measures sometimes provide conflicting results. Discuss why conflicting results can occur. (1 mark) (b) Cindy believes that the Sharpe and Treynor indices will provide similar results for a fund that is well diversified. Do you agree with Cindy? Why? (1 mark) c) Cindy has performed a time-series regression analysis on the portfolio p using the Fama-French three-factor model. The following shows her regression result: Ry Rp = 0.15 + 0.15 (Rm Rp) + 0.40 X SMB 0.25 X HML + Ep Cindy's result indicates that the portfolio's Jensen's alpha is (1 mark) (d) The table below shows Cindy's investment performance and the benchmark portfolio. Benchmark Cindy Weight Return Weight Return Stock 0.40 5.20% 0.30 6.00% Bonds 0.25 1.20% 0.50 1.50% Cash 0.35 0.80% 0.20 1.10% According to the table, the return that can be attributable to Cindy's securities selection skills is 9 and asset allocation skills is _%, respectively. (2 marks)
