Problem 6 (20 marks)

The following performance information given to you:

Benchmark Portfolio

Joe's Portfolio

Kim's Portfolio

Weight

Return

Weight

Return

Weight

Return

Stocks

0.6

-5.00%

Stocks

0.5

-4.00%

Stocks

0.3

-5.00%

Bonds

0.3

3.50%

Bonds

0.2

2.50%

Bonds

0.4

3.50%

T-Bills

0.1

1.00%

Cash

0.3

1.00%

Cash

0.3

1.00%

The risk-free rate is 1% and the standard deviation for the Benchmark portfolio is 3.50%, Joe's portfolio is 5.00% and Kim's portfolio is 3.00%.

1.Compare Joe's and Kim's performance relative to the benchmark in terms of portfolio returns.

2.If they are beating the market, determine the sources of their success in terms of security selection and asset allocation.

(a) Who is superior in security selection?

(b) Who is superior in asset allocation?

3.Using Sharpe Index, determine which manager is performing better than the market in a risk adjusted basis.