Question
QUESTION 1 Investor X held an investment portfolio in stocks. Its efficacy evaluation is of interest. Elucidate on three approaches in which Treynor's Performance Measure
QUESTION 1
- Investor X held an investment portfolio in stocks. Its efficacy evaluation is of interest. Elucidate on three approaches in which Treynor's Performance Measure contributes to this assessment.
- marks)
- Consider the following historical performance data for two different portfolios, the Standard & Poor's 500, and the 90-day T-Bill.
Investment vehicle | Average rate of return | Standard deviation | Beta | R2 |
Fund 1 | 26.4% | 20.67% | 1.351 | 0.751 |
Fund 2 | 13.22 | 14.20 | 0.905 | 0.713 |
S&P 500 | 15.70 | 13.25 | ||
90-day T-bill | 6.20 | 0.50 |
i. Calculate the Fama overall performance measure for both funds. (2 marks)
ii. Find the return to risk for both funds. (3 marks)
ii. For both funds, compute the measures of selectivity, diversification and net selectivity.
(2 marks)
iii.Describe how the net selectivity measurement assists in the evaluation of investor performance.
(3 marks)
(10 marks)
(20 marks)
QUESTION 2
a) Alina, a pension consultant, was questioned by a number of trustees regarding multifaceted facets of performance evaluation and risk assessment throughout the yearly review of Acme's pension plan. Particularly, one trustee inquired as to whether the following benchmarks could be utilized appropriately:
-1 Market Index
-2 Normal benchmark portfolio
-3 Manager universe median
Discuss two different weaknesses of using each of the three benchmarks to measure the performance of a portfolio.
(10 marks)
b) Investor P is analyzing the performance of two mutual funds, Fund A and Fund B. Fund A outperformed the market, while Fund B underperformed. How does Jensen's Alpha help in assessing these funds' performance?
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