Raj and Maya have an investment portfolio with 4 investments that is meant to provide a balance between current income and capital growth. To achieve this, Raj and Maya developed their portfolio over the past 3 years based on the idea of diversifying across various asset classes. Their portfolio contains the following asset classes:
• Common stock;
• Corporate bonds;
• Mutual fund shares;
• Options.
Raj and Maya would like to pass their portfolio over to you to manage. Before doing so, they are interested in measuring the return on their investment and assessing how well their portfolio has performed compared with the market. They hope that the return they generated from their portfolio over the past year is greater than the return they would have gained by investing in a portfolio consisting of the S&P500 stock index, which returned 9.4% in the last year. The risk-free rate was 5.4%.
You have agreed to analyse Raj and Maya’s portfolio, and you have estimated their portfolio’s beta to be 1.23.
Raj and Maya requested that you not consider any taxes in your analysis.
Raj and Maya’s investment portfolio
• Common stock
o 500 shares of Corinthian Tools Manufacturing
o Quarterly dividends of $0.25, $0.25, $0.30, and $0.30 paid during the year
o Strong history of consistently paying dividends
o Expanding market shares offers moderate potential for capital gains
o Share price at beginning of year = $19.55
o Share price at end of year = $22.15
• Corporate bonds
o 12 bonds issued by Doric Highways Infrastructure
o Par value = $1,000
o Reach maturity in 2030
o Coupon rate = 8.750%
o ‘A’ bond rating by Fitch
o Market value of bond at beginning of year = 98.350
o Market value of bond at end of year = 96.500
• Mutual fund shares
o 400 shares in the Ionic Fund
o Balanced mutual fund
o Dividend distribution composition
▪ $0.75 investment income
▪ $0.60 capital gains
o NAV at beginning of year = $20.20
o NAV at end of year = $21.15
• Options
o 100 contracts on the stock of a pet food company
o Value of 100 contracts at beginning of year = $23,000
o Value of 100 contracts at end of year = $25,000

a) Calculate the holding period return for each of the 4 investments.

b) Calculate the holding period return for Raj and Maya’s entire portfolio.

c) With regard to Raj and Maya’s portfolio objective, comment on the portfolio’s total return relative to its current income and capital gain components. Note that no assets were sold or purchased in the last year, so no capital gains or losses were realised – the portfolio’s capital gains are notional and represent the appreciation of the assets.

d) Using the previously calculated holding period return for Raj and Maya’s portfolio, calculate the Jensen’s measure. Comment on the performance of their portfolio on a risk-adjusted, market-adjusted basis.

e) Is it reasonable to use Jensen’s measure to evaluate Raj and Maya’s portfolio? Why or why not?

f) Raj and Maya are happy to consider revising their portfolio. Do you have any recommendations for them? Explain your recommendations.