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FIN 010 Lecture Notes - Lecture 29: Santa Barbara City College, Risk-Free Interest Rate, Market Neutral

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School
SBCC
Department
Finance
Course
FIN 010
Professor
Block

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Document Summary

Managers can switch between equity & bonds, so portfolio return = return opn equity market + put option on equity market (where option only valuable when equity < risk free rate) Shifting funds between a market index portfolio and a safe asset. Factors from anomalies discussed -> relevance to performance evaluation. (sharpe, jensen etc) to the market or to the benchmark (takes into account style) Loading on bab reflects tendency to buy safe (low beta stocks) and away from risky (high beta stocks) Loading on the quality qmj (quality minus junk) companies that are profitable, growing, safe and have high payout. Not luck: the outperformance: decompose relative performance into security selection and asset allocation (market, industry, security). Need long observation period to measure any with precision (even if return dist. is stable with constant mean) What if mean and variance are not constant (need to track portfolio changes) Directional: bets that one sector will outperform others.

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Related Questions

Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core large-cap equity fund. The market proxy and benchmark for performance measurement purposes is the S&P 500. Although the Miranda portfolio generally mirrors the asset class and sector weightings of the S&P, Blakely is allowed a significant amount of leeway in managing the fund. Her portfolio holds only stocks found in the S&P 500 and cash.

Blakely was able to produce exceptional returns last year (as outlined in the table below) through her market timing and security selection skills. At the outset of the year, she became extremely concerned that the combination of a weak economy and geopolitical uncertainties would negatively impact the market. Taking a bold step, she changed her market allocation. For the entire year her asset class exposures averaged 50% in stocks and 50% in cash. The S&P’s allocation between stocks and cash during period was a constant 97% and 3%, respectively. The risk-free rate of return was 2%.

One-Year Trailing Returns
Miranda Fund S&P 500
Return 10.2% –22.5%
Standard deviation 37% 44%
Beta 1.10 1.00

a.

What are the Sharpe ratios for the Miranda Fund and the S&P 500? (Do not round intermediate calculations. Enter answer values in decimals. Negative amount should be indicated by a minus sign. Round your answer to 4 decimal places.)

Sharpe ratio for the Miranda Fund
Sharpe ratio for the S&P 500

b.

What are the M 2 measures for Miranda? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

M 2 measure for Miranda %

c.

What is the Treynor measure for the Miranda Fund and the S&P 500? (Do not round intermediate calculations. Enter answer values in decimals. Round your answer to 4decimal places.

Treynor measure for the Miranda Fund
Treynor measure for the S&P 500

d.

What is the Jensen measure for the Miranda Fund? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Jensen measure for the Miranda Fund %

Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core large-cap equity fund. The market proxy and benchmark for performance measurement purposes is the S&P 500. Although the Miranda portfolio generally mirrors the asset class and sector weightings of the S&P, Blakely is allowed a significant amount of leeway in managing the fund. Her portfolio holds only stocks found in the S&P 500 and cash. Blakely was able to produce exceptional returns last year (as outlined in the table below) through her market timing and security selection skills. At the outset of the year, she became extremely concerned that the combination of a weak economy and geopolitical uncertainties would negatively impact the market. Taking a bold step, she changed her market allocation. For the entire year her asset class exposures averaged 50% in stocks and 50% in cash. The S&P’s allocation between stocks and cash during period was a constant 97% and 3%, respectively. The risk-free rate of return was 2%. One-Year Trailing Returns Miranda Fund S&P 500 Return 10.2% –22.5% Standard deviation 37% 44% Beta 1.10 1.00 a. What are the Sharpe ratios for the Miranda Fund and the S&P 500? (Do not round intermediate calculations. Enter answer values in decimals. Negative amount should be indicated by a minus sign. Round your answer to 4 decimal places.) Sharpe ratio for the Miranda Fund Sharpe ratio for the S&P 500 b. What are the M 2 measures for Miranda? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) M 2 measure for Miranda % c. What is the Treynor measure for the Miranda Fund and the S&P 500? (Do not round intermediate calculations. Enter answer values in decimals. Round your answer to 4decimal places. Treynor measure for the Miranda Fund Treynor measure for the S&P 500 d. What is the Jensen measure for the Miranda Fund? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Jensen measure for the Miranda Fund %

12. Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core large-cap equity fund. The market proxy and benchmark for performance measurement purposes is the S&P 500. Although the Miranda portfolio generally mirrors the asset class and sector weightings of the S&P, Blakely is allowed a significant amount of leeway in managing the fund. Her portfolio holds only stocks found in the S&P 500 and cash.

Blakely was able to produce exceptional returns last year (as outlined in the table below) through her market timing and security selection skills. At the outset of the year, she became extremely concerned that the combination of a weak economy and geopolitical uncertainties would negatively impact the market. Taking a bold step, she changed her market allocation. For the entire year her asset class exposures averaged 50% in stocks and 50% in cash. The S&P’s allocation between stocks and cash during period was a constant 97% and 3%, respectively. The risk-free rate of return was 2%.

One-Year Trailing Returns
Miranda Fund S&P 500
Return 10.2% –22.5%
Standard deviation 37% 44%
Beta 1.10 1.00

a.

What are the Sharpe ratios for the Miranda Fund and the S&P 500? (Do not round intermediate calculations. Enter answer values in decimals. Negative amount should be indicated by a minus sign. Round your answer to 4 decimal places.)
Sharpe ratio for the Miranda Fund _________??
Sharpe ratio for the S&P 500 _________??

b.

What are the M 2 measures for Miranda? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
M 2 measure for Miranda _____________ %??

c.

What is the Treynor measure for the Miranda Fund and the S&P 500? (Do not round intermediate calculations. Enter answer values in decimals. Round your answer to 4 decimal places.
Treynor measure for the Miranda Fund __________??
Treynor measure for the S&P 500 ___________??

d.

What is the Jensen measure for the Miranda Fund? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Jensen measure for the Miranda Fund __________ %??