Lecture 9 & 10

Question 1

When a manager is not worth it

Answer 1

Levered Index position has same risk return profile

ex ante rules could have achieved similar return

–> only pay infrastructure and skill

Question 2

Adjust returns

Answer 2

Against benchmark

Question 3

Sharpe Ratio

Answer 3

(rp-rf)/sigmap

If portfolio is not diversified

Question 4

M^2

Answer 4

Create adjusted portfolio that has the same standard deviation than market. Look for return

Question 5

Treynors Measure

Answer 5

Sharpe Ratio with systematic risk beta

Portfolio diversified and systematic risk neglegible

Question 6

Jensens alpha

Answer 6

alpha above prediction from CAPM

alpha = rp - [rf + beta(rm-rf)]

use, if a fund is merely part of another giant portfolio (high diversified)

Question 7

Information ratio

Answer 7

measures normal return per unit of risk that could have been diversified away by a market index portf.

IR = alpha p / sigma ep

Question 8

Performance measurement of hedgefunds

Answer 8

Sp^2 = Sm^2 + (alpha h / alpha e)^2

Question 9

Market timing with perfect foresight

Answer 9

Security market line creates a nonlinear beta

–> works like a call option

Question 10

How to set up a benchmark portfolio

Answer 10

• Select benchmark index portfolio for each asset class
• Choose weights based on market expectations
• Choose portfolio of securities within each class by security analysis
• Calculate return on the benchmark on the managed portfolio and explain the difference in return based on weights or selection
• Summarize the performance differences into appropriate categories