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 9 260 2 751 0 410 0 960 4 040 4 630 2 7 582 7 562 0 410 6 170 3 470 0 080 3 2 109 1 978 0 470 1 590 3 150 1 080 4 5 076 6 235 0 450 4 840 1 580 2 530 5 1 754 0 775 0 400 0 480 2 540 4 820 6 5 028 4 102 0 420 4 870 0 310 3 860 7 4 074 5 955 0 440 3 820 5 140 1 210 8 8 071 6 094 0 480 6 640 4 620 4 090 9 3 393 4 470 0 370 4 060 1 360 0 830 10 6 909 7 961 0 420 7 190 2 360 0 680 11 0 282 5 597 0 420 4 070 7 450 0 890 12 3 079 5 477 0 430 5 370 2 570 0 380 13 1 617 3 337 0 410 3 830 0 940 2 540 14 2 934 4 620 0 400 2 720 5 050 1 040 15 0 435 1 720 0 470 1 330 2 320 3 610 16 1 074 1 103 0 430 0 000 1 020 1 680 17 8 572 7 214 0 400 6 900 0 300 1 230 18 3 804 5 127 0 380 4 750 1 460 1 930 19 0 742 1 000 0 430 0 650 0 400 0 220 20 2 554 1 726 0 400 2 950 3 620 4 290 21 4 639 4 065 0 420 2 860 3 390 1 530 22 1 799 1 065 0 390 2 720 4 510 1 800 23 17 061 14 449 0 420 16 120 5 920 5 690 24 15 707 6 406 0 450 5 940 0 020 3 760 25 3 530 8 136 0 310 7 120 3 350 2 850 26 3 588 6 054 0 320 5 860 1 350 3 680 27 10 001 5 754 0 380 5 940 0 310 4 940 28 6 632 4 177 0 350 3 460 1 150 6 150 29 4 206 3 111 0 350 4 160 5 600 1 660 30 5 440 3 991 0 420 3 310 3 820 3 040 31 0 810 3 871 0 380 4 470 2 880 2 790 32 3 516 2 352 0 330 2 390 3 470 3 090 33 4 734 5 544 0 400 4 710 3 430 4 320 34 0 767 3 114 0 370 3 440 2 010 0 690 35 1 879 0 502 0 380 1 350 1 160 1 250 36 1 184 2 744 0 400 2 680 3 220 3 170 37 7 072 6 319 0 380 5 800 6 530 3 190 38 2 438 2 031 0 370 3 200 7 700 8 100 39 10 059 5 883 0 450 7 830 6 970 9 060 40 3 842 5 029 0 420 4 420 4 070 0 160 41 5 779 1 882 0 430 2 550 21 490 12 030 For both AFNDX and SPX, calculate the series of monthly risk premia (stated returns in excess of the risk free rate) for the 41 month sample period Use these excess return data to compute the Sharpe ratio for both AFNDX and SPX Do not round intermediate calculations Round your answers to three decimal places Sharpe ratio for AFNDX Sharpe ratio for SPX Based on a regression of the excess returns to AFNDX on the excess returns to SPX, use regression analysis to calculate the active managers (1) one factor Jensens alpha coefficient, (2) beta coefficient, and (3) R squared measure Briefly explain what each of these statistics tells you about how AFNDX has been managed Do not round intermediate calculations Round your answers to four decimal places Jensens alpha coefficient The value indicates that the manager generated a Select higherlowerItem 4 return than what was expected given the portfolios risk level Beta coefficient The fund is only slightly Select morelessItem 6 volatile than the market R squared measure It is Select higherlowerItem 8 than 0 50, which means that the funds performance Select isis notItem 9 statistically related to the benchmark Using your work in parts (a) and (b), calculate the Treynor ratio performance measures for both AFNDX and SPX, assuming a beta coefficient of 1 00 for the latter Do not round intermediate calculations Round your answers to three decimal places Treynor ratio for AFNDX Treynor ratio for SPX Compare what the Sharpe and Treynor measures indicate about the ability of AFNFXs manager to beat the market on a risk adjusted basis If the two measures give contradictory indications, reconcile that discrepancy The portfolio has a Select higherlowerItem 12 risk premium per unit of risk than the market portfolio as indicated by the Sharpe ratio The portfolio plots Select abovebelowItem 13 the SML, indicating Select superiorinferiorItem 14 risk adjusted performance, as its T value is Select higherlowerItem 15 than the market portfolios 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

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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.

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	9.260	2.751	0.410	0.960	-4.040	4.630
2	7.582	7.562	0.410	6.170	-3.470	0.080
3	-2.109	-1.978	0.470	-1.590	3.150	1.080
4	5.076	6.235	0.450	4.840	-1.580	-2.530
5	-1.754	0.775	0.400	-0.480	-2.540	4.820
6	-5.028	-4.102	0.420	-4.870	-0.310	3.860
7	4.074	5.955	0.440	3.820	-5.140	-1.210
8	8.071	6.094	0.480	6.640	4.620	-4.090
9	3.393	4.470	0.370	4.060	1.360	0.830
10	6.909	7.961	0.420	7.190	-2.360	-0.680
11	0.282	-5.597	0.420	-4.070	7.450	0.890
12	3.079	5.477	0.430	5.370	2.570	-0.380
13	-1.617	-3.337	0.410	-3.830	-0.940	2.540
14	-2.934	4.620	0.400	2.720	-5.050	1.040
15	0.435	1.720	0.470	1.330	-2.320	3.610
16	-1.074	1.103	0.430	0.000	-1.020	-1.680
17	8.572	7.214	0.400	6.900	0.300	-1.230
18	3.804	5.127	0.380	4.750	-1.460	1.930
19	0.742	1.000	0.430	0.650	0.400	0.220
20	-2.554	-1.726	0.400	-2.950	-3.620	4.290
21	4.639	4.065	0.420	2.860	-3.390	-1.530
22	-1.799	-1.065	0.390	-2.720	-4.510	-1.800
23	-17.061	-14.449	0.420	-16.120	-5.920	5.690
24	15.707	6.406	0.450	5.940	0.020	-3.760
25	-3.530	8.136	0.310	7.120	-3.350	-2.850
26	3.588	6.054	0.320	5.860	1.350	-3.680
27	10.001	5.754	0.380	5.940	-0.310	-4.940
28	6.632	4.177	0.350	3.460	1.150	-6.150
29	-4.206	-3.111	0.350	-4.160	-5.600	1.660
30	5.440	3.991	0.420	3.310	-3.820	-3.040
31	0.810	3.871	0.380	4.470	2.880	2.790
32	-3.516	-2.352	0.330	-2.390	3.470	3.090
33	4.734	5.544	0.400	4.710	3.430	-4.320
34	-0.767	-3.114	0.370	-3.440	2.010	0.690
35	-1.879	-0.502	0.380	-1.350	-1.160	-1.250
36	-1.184	-2.744	0.400	-2.680	3.220	-3.170
37	7.072	6.319	0.380	5.800	-6.530	-3.190
38	2.438	2.031	0.370	3.200	7.700	-8.100
39	10.059	5.883	0.450	7.830	6.970	-9.060
40	-3.842	-5.029	0.420	-4.420	4.070	-0.160
41	5.779	-1.882	0.430	2.550	21.490	-12.030

For both AFNDX and SPX, calculate the series of monthly risk premia (stated returns in excess of the risk-free rate) for the 41-month sample period. Use these excess return data to compute the Sharpe ratio for both AFNDX and SPX. Do not round intermediate calculations. Round your answers to three decimal places.
Sharpe ratio for AFNDX:

Sharpe ratio for SPX:
Based on a regression of the excess returns to AFNDX on the excess returns to SPX, use regression analysis to calculate the active managers (1) one-factor Jensens alpha coefficient, (2) beta coefficient, and (3) R-squared measure. Briefly explain what each of these statistics tells you about how AFNDX has been managed. Do not round intermediate calculations. Round your answers to four decimal places.
1. Jensens alpha coefficient:
  The value indicates that the manager generated a -Select-higherlowerItem 4 return than what was expected given the portfolios risk level.
2. Beta coefficient:
  The fund is only slightly -Select-morelessItem 6 volatile than the market.
3. R-squared measure:
  It is -Select-higherlowerItem 8 than 0.50, which means that the funds performance -Select-isis notItem 9 statistically related to the benchmark.
Using your work in parts (a) and (b), calculate the Treynor ratio performance measures for both AFNDX and SPX, assuming a beta coefficient of 1.00 for the latter. Do not round intermediate calculations. Round your answers to three decimal places.
Treynor ratio for AFNDX:

Treynor ratio for SPX:
Compare what the Sharpe and Treynor measures indicate about the ability of AFNFXs manager to beat the market on a risk-adjusted basis. If the two measures give contradictory indications, reconcile that discrepancy.
The portfolio has a -Select-higherlowerItem 12 risk premium per unit of risk than the market portfolio as indicated by the Sharpe ratio. The portfolio plots -Select-abovebelowItem 13 the SML, indicating -Select-superiorinferiorItem 14 risk-adjusted performance, as its T value is -Select-higherlowerItem 15 than the market portfolios.
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.