Problem 18 10 You work for a private wealth management firm that follows an external investment model, whereby it decides which outside managers it should recommend to clients One mutual fund that is a candidate for inclusion on your Premier Recommended List of approved managers is Active Fund (AFNDX), an actively managed stock portfolio benchmarked to the Standard Poors 500 (SPX) Index You have been asked to perform an evaluation of AFNDXs past investment performance, using a sample of monthly returns on the following positions (1) AFNDX portfolio, (2) SPX Index, (3) U S Treasury bills, and (4) the three primary FamaFrench risk factors (excess market, SMB, and HML) These data are listed below Monthly Return Data for AFNDX, SPX, T Bill, and FamaFrench Factors RETURNS TO F F FACTOR RETURNS Month AFNDX SPX Index T Bill (RF) Excess Mkt SMB HML 1 9 246 2 760 0 420 0 980 4 040 4 630 2 7 585 7 547 0 420 6 160 3 450 0 100 3 2 107 1 984 0 470 1 610 3 140 1 070 4 5 076 6 254 0 450 4 860 1 570 2 540 5 1 751 0 794 0 380 0 490 2 540 4 840 6 5 028 4 103 0 430 4 860 0 320 3 840 7 4 054 5 955 0 420 3 830 5 140 1 200 8 8 052 6 077 0 480 6 650 4 630 4 090 9 3 401 4 477 0 380 4 050 1 350 0 820 10 6 898 7 955 0 430 7 200 2 360 0 680 11 0 283 5 587 0 410 4 050 7 450 0 890 12 3 067 5 475 0 430 5 370 2 590 0 390 13 1 615 3 343 0 410 3 820 0 940 2 520 14 2 939 4 615 0 380 2 710 5 050 1 050 15 0 451 1 721 0 470 1 320 2 340 3 590 16 1 054 1 109 0 430 0 020 1 000 1 670 17 8 575 7 212 0 390 6 880 0 280 1 240 18 3 808 5 112 0 400 4 760 1 450 1 930 19 0 742 1 013 0 430 0 670 0 410 0 230 20 2 550 1 714 0 390 2 960 3 610 4 300 21 4 638 4 049 0 400 2 870 3 400 1 530 22 1 784 1 056 0 390 2 730 4 520 1 780 23 17 070 14 448 0 440 16 120 5 930 5 700 24 15 714 6 406 0 450 5 960 0 030 3 770 25 3 536 8 128 0 320 7 100 3 370 2 860 26 3 590 6 052 0 310 5 850 1 370 3 670 27 10 014 5 767 0 370 5 950 0 300 4 940 28 6 620 4 185 0 340 3 470 1 150 6 150 29 4 205 3 110 0 360 4 150 5 590 1 660 30 5 432 4 005 0 430 3 330 3 830 3 050 31 0 812 3 871 0 370 4 460 2 880 2 790 32 3 518 2 360 0 340 2 390 3 470 3 090 33 4 735 5 544 0 410 4 710 3 420 4 330 34 0 749 3 109 0 380 3 460 2 000 0 710 35 1 875 0 500 0 390 1 340 1 170 1 260 36 1 178 2 740 0 390 2 670 3 240 3 180 37 7 067 6 331 0 380 5 810 6 530 3 180 38 2 424 2 023 0 350 3 190 7 700 8 090 39 10 067 5 884 0 430 7 830 6 990 9 050 40 3 840 5 029 0 410 4 430 4 080 0 160 41 5 783 1 901 0 440 2 540 21 490 12 030 Calculate the tracking error ( TE ) for AFNDX relative to the SPX benchmark, on both a monthly and an annualized basis What does this TE error measure suggests about the managers investment style Do not round intermediate calculations Round your answers to four decimal places Tracking error on a monthly basis Tracking error on an annualized basis The value of tracking error indicates that the Select activestructuredpassiveItem 18 managers investment style is used because the annualized TE is Select less than 1 0between 1 0 and 3 0over 3 0Item 19 Using the excess returns from part (a), compute the information ratio ( IR ) for AFNDX relative to the SPX benchmark on both a monthly basis and an annualized basis Briefly explain what this IR suggests about the managers investment prowess relative to the general equity market Do not round intermediate calculations Round your answers to four decimal places Information ratio on a monthly basis Information ratio on an annualized basis The managers investment prowess relative to the general equity market is considered as Select badgoodexceptionalItem 22 because the annualized IR is Select less than 0 5greater than or equal to 0 5 and less than 1 0equal to 1 0Item 23 Estimate a regression of AFNDXs excess returns on the three FamaFrench risk factors Interpret each of the following components of your regression output (1) the intercept coefficient, (2) the beta coefficients for each of the three independent variables, and (3) the R squared measure Use a 5 level of significance Do not round intermediate calculations Round your answers to four decimal places Use a minus sign to enter negative values, if any Intercept coefficient , statistically Select insignificantsignificantItem 25 Beta coefficients Excess market , statistically Select insignificantsignificantItem 27 SMB , statistically Select insignificantsignificantItem 29 HML , statistically Select insignificantsignificantItem 31 R squared measure , statistically Select insignificantsignificantItem 33

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Problem 18-10 You work for a private wealth management firm that follows an external investment model, whereby it decides which outside managers it should recommend

Problem 18-10

You work for a private wealth management firm that follows an external investment model, whereby it decides which outside managers it should recommend to clients. One mutual fund that is a candidate for inclusion on your Premier Recommended List of approved managers is Active Fund (AFNDX), an actively managed stock portfolio benchmarked to the Standard & Poors 500 (SPX) Index. You have been asked to perform an evaluation of AFNDXs past investment performance, using a sample of monthly returns on the following positions: (1) AFNDX portfolio, (2) SPX Index, (3) U.S. Treasury bills, and (4) the three primary FamaFrench risk factors (excess market, SMB, and HML). These data are listed below.

Monthly Return Data for AFNDX, SPX, T-Bill, and FamaFrench Factors
	% RETURNS TO:			F-F FACTOR % RETURNS:
Month	AFNDX	SPX Index	T-Bill (RF)	Excess Mkt	SMB	HML
1	9.246	2.760	0.420	0.980	-4.040	4.630
2	7.585	7.547	0.420	6.160	-3.450	0.100
3	-2.107	-1.984	0.470	-1.610	3.140	1.070
4	5.076	6.254	0.450	4.860	-1.570	-2.540
5	-1.751	0.794	0.380	-0.490	-2.540	4.840
6	-5.028	-4.103	0.430	-4.860	-0.320	3.840
7	4.054	5.955	0.420	3.830	-5.140	-1.200
8	8.052	6.077	0.480	6.650	4.630	-4.090
9	3.401	4.477	0.380	4.050	1.350	0.820
10	6.898	7.955	0.430	7.200	-2.360	-0.680
11	0.283	-5.587	0.410	-4.050	7.450	0.890
12	3.067	5.475	0.430	5.370	2.590	-0.390
13	-1.615	-3.343	0.410	-3.820	-0.940	2.520
14	-2.939	4.615	0.380	2.710	-5.050	1.050
15	0.451	1.721	0.470	1.320	-2.340	3.590
16	-1.054	1.109	0.430	0.020	-1.000	-1.670
17	8.575	7.212	0.390	6.880	0.280	-1.240
18	3.808	5.112	0.400	4.760	-1.450	1.930
19	0.742	1.013	0.430	0.670	0.410	0.230
20	-2.550	-1.714	0.390	-2.960	-3.610	4.300
21	4.638	4.049	0.400	2.870	-3.400	-1.530
22	-1.784	-1.056	0.390	-2.730	-4.520	-1.780
23	-17.070	-14.448	0.440	-16.120	-5.930	5.700
24	15.714	6.406	0.450	5.960	0.030	-3.770
25	-3.536	8.128	0.320	7.100	-3.370	-2.860
26	3.590	6.052	0.310	5.850	1.370	-3.670
27	10.014	5.767	0.370	5.950	-0.300	-4.940
28	6.620	4.185	0.340	3.470	1.150	-6.150
29	-4.205	-3.110	0.360	-4.150	-5.590	1.660
30	5.432	4.005	0.430	3.330	-3.830	-3.050
31	0.812	3.871	0.370	4.460	2.880	2.790
32	-3.518	-2.360	0.340	-2.390	3.470	3.090
33	4.735	5.544	0.410	4.710	3.420	-4.330
34	-0.749	-3.109	0.380	-3.460	2.000	0.710
35	-1.875	-0.500	0.390	-1.340	-1.170	-1.260
36	-1.178	-2.740	0.390	-2.670	3.240	-3.180
37	7.067	6.331	0.380	5.810	-6.530	-3.180
38	2.424	2.023	0.350	3.190	7.700	-8.090
39	10.067	5.884	0.430	7.830	6.990	-9.050
40	-3.840	-5.029	0.410	-4.430	4.080	-0.160
41	5.783	-1.901	0.440	2.540	21.490	-12.030

Calculate the tracking error (TE) for AFNDX relative to the SPX benchmark, on both a monthly and an annualized basis. What does this TE error measure suggests about the managers investment style? Do not round intermediate calculations. Round your answers to four decimal places.
Tracking error on a monthly basis:

Tracking error on an annualized basis:

The value of tracking error indicates that the -Select-activestructuredpassiveItem 18 managers investment style is used because the annualized TE is -Select-less than 1.0between 1.0 and 3.0over 3.0Item 19 .
Using the excess returns from part (a), compute the information ratio (IR) for AFNDX relative to the SPX benchmark on both a monthly basis and an annualized basis. Briefly explain what this IR suggests about the managers investment prowess relative to the general equity market. Do not round intermediate calculations. Round your answers to four decimal places.
Information ratio on a monthly basis:

Information ratio on an annualized basis:

The managers investment prowess relative to the general equity market is considered as -Select-badgoodexceptionalItem 22 because the annualized IR is -Select-less than 0.5greater than or equal to 0.5 and less than 1.0equal to 1.0Item 23 .
Estimate a regression of AFNDXs excess returns on the three FamaFrench risk factors. Interpret each of the following components of your regression output: (1) the intercept coefficient, (2) the beta coefficients for each of the three independent variables, and (3) the R-squared measure. Use a 5% level of significance. Do not round intermediate calculations. Round your answers to four decimal places. Use a minus sign to enter negative values, if any.
1. Intercept coefficient: , statistically -Select-insignificantsignificantItem 25 .
2. Beta coefficients: Excess market: , statistically -Select-insignificantsignificantItem 27 .
  
  SMB: , statistically -Select-insignificantsignificantItem 29 .
  
  HML: , statistically -Select-insignificantsignificantItem 31 .
3. R-squared measure: , statistically -Select-insignificantsignificantItem 33 .