Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core larg

Question

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 the period was a constant 93% and 7%, respectively. The risk-free rate of return was 2%.

One-Year Trailing Returns

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

b. What is the M2 measure for Miranda? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. What is the Treynor measure for the Miranda Fund and the S&P 500? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 4 decimal places.)

d. What is the Jensen measure for the Miranda Fund? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

One-Year Trailing Returns

Miranda Fund S&P 500   Return 10.4 % 20.9 %   Standard deviation 35.0 % 40 %   Beta 1.20 1.00

Explanation / Answer

a. Sharpe Ratio = (Expected portfolio return - Risk free rate) / Portfolio Standard Deviation

Mirands Fund    = (10.4% - 2% / 35% = 0.24 or 24%

S & P 500         = (-20.9 - 2% / 40% = -0.5725 or -57%

b. M2 Measure = Risk free rate + Portfolio Sharpe * Market Standard deviation

Miranda fund    = 2% + 24% * 35% = 0.104 or 10.4%

c. Treynor measure = (Return on portfolio - Risk free rate) / Beta

Miranda Fund         = (10.4% - 2%) / 1.2 = 0.07 or 7%

S & P 500              = (-20.9% - 2%) / 1.0 = -0.229 or -22.9%

d. Jensen measure = Expected portfolio return - [ Risk free rate + Beta (Expected market return - Risk free rate)]

Miranda fund          = 10.4% - [2% + 1.20 (10.4% - 2%)]

                            = 10.4% - [2% + 0.1008]

                            = 0.104 - 0.1208 = -0.0168 or -1.68%

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