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Performance Evaluation in Chapter 24

This document contains two practice questions from a problem set on portfolio management. Q1 asks about analyzing the performance of Fund F relative to its benchmark portfolio B based on their stock and bond allocations and returns. Q2 evaluates two stocks, X and Y, and asks which would be preferable for different investment purposes based on their expected return, beta, and risk. It also involves calculating performance measures for a leveraged portfolio Z that takes a 150% long position in stock X.

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Kacper Benedykciński
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10 views2 pages

Performance Evaluation in Chapter 24

This document contains two practice questions from a problem set on portfolio management. Q1 asks about analyzing the performance of Fund F relative to its benchmark portfolio B based on their stock and bond allocations and returns. Q2 evaluates two stocks, X and Y, and asks which would be preferable for different investment purposes based on their expected return, beta, and risk. It also involves calculating performance measures for a leveraged portfolio Z that takes a 150% long position in stock X.

Uploaded by

Kacper Benedykciński
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Problem Set 6

Key questions: Q1, Q2

Selected end‐of‐chapter questions


BKM Chapter 24: Q8, 9, 11, 16, 18, 21
Q1
The fund F has been investing in stocks and bonds. Given their strategy, an appropriate
benchmark portfolio is B. The performance and weights of F and B over the last year are given
in the table below.

Asset class 𝑤𝐹 𝑤𝐵 𝑟𝐹 𝑟𝐵
Stocks 0.8 0.75 11% 8%
Bonds 0.2 0.25 3% 5%

a. To what would you attribute the performance of F relative to B in the stock category?
b. To what would you attribute the performance of F relative to B in the bonds category?
c. To what would you attribute the total performance of F relative to B?

Q2
You want to evaluate the stocks 𝑋 and 𝑌 using the data in the table below. The risk-free rate, 𝑟𝑓 ,
is 3%.
Asset E(r) 𝛽 𝜎
X 16% 1.3 40%
Y 9% 0.9 30%
M 12% 1 20%

(a) Suppose you’re planning let either X or Y constitute your entire risky investment. Which
would you choose and why?
(b) Suppose you’re planning to add a small amount of either X or Y to your well-diversified
portfolio. Which would you choose and why?
(c) Suppose you’re planning to use either X or Y to exploit mispricing in the market. Which
would you choose and why?
(d) What is the 𝑀2 measure for the two stocks?

Now from a new portfolio, 𝑍, by taking a leveraged position in asset 𝑋. Specifically, invest
150% of your wealth in asset 𝑋 and finance it with an appropriate short position in the risk-free
asset

(e) What is the Treynor measure of asset 𝑍?


(f) What is the 𝛼 of asset 𝑍?
(g) What is the Information Ratio of asset 𝑍?

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