Page 335 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 6. Suppose the standard deviations, betas and average rates of return of several managed
portfolio are given below, along with the standard deviation and average rate of return of
the market index. The beta of the index is assumed to be 1. Further assume the T-Bills rate
average 7% during the time period performance measurement. Compare these funds on
performance using the Sharpe, Treynor and Jensen measures.
Fund Average Return Std. Deviation Beta
A 0.15 0.25 1.25
B 0.12 0.30 0.75
C 0.10 0.20 1.00
0.12

~ 0.25 1.00
Rm

7. SBI and ICICI are two mutual funds. SBI has a sample mean of success 0.13 and fund ICICI
has a sample mean of success 0.18, with the riskier fund ICICI having double the beta at 2.0
as fund SBI. The respective standard deviations are 15% of ICICI and 19% of SBI. The mean
return for market index is 0.12, while the risk-free return is 8%.
(a) Compute the Jensen index for each of the funds. What does it indicate?
(b) Compute the Treynor index for the funds. Interpret the results and compare it to the
Jensen index.
(c) Compute the Sharpe index for funds and the market.
8. Assume that you are an administrator of a large pension fund (i.e. Terry Teague of Boeing)
and you are decide whether to renew your contracts with your three money managers.
You must measure how they have performed. Assume you have the following results for
each individual’s performance: Market return 14%, Risk-free 8% and Beta 1.
Investment Manager Average Annual Rate of Return Beta
Z 0.12 0.90
B 0.16 1.05
Y 0.18 1.2

9. Shares of ICICI Co. pay a 2 dividend at the end of every year on December 31.
An investor buys two shares of the stock on January 1, at a price of 20 each, sells one of
those shares for 22 a year later on the next January 1, and sells the second share an
additional year later for 19. Find the time and rupee-weighted rates of return on the
2-year investment.

Time Action Cash Flow
0 Buy two shares -4
1 Collect dividends, then sell one of the shares 4+22

2 Collect dividend on remaining shares, then sell it 2+19

10. What do you think to be the two most important objectives of portfolio performance
evaluation?
11. Examine the concepts of plain Sharpe's Ratio, Treynor's Measure, and Jensen's Differential
Return.

12. Which method of calculating portfolio returns do you think to be the best and why?

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