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 stop, 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 94% and 6%, respectively. The risk-free rate of return was 3%. What are the Sharpe ratios for the Miranda Fund and the S & P 500? What is the M^2 measure for Miranda? What is the Treynor measure for the Miranda Fund and the S& P 500? What is the Jensen measure for the Miranda Fund?

Explanation / Answer

Question a. Miranda S&P One year Trailling Return 10.50% -20.80% Risk free Return 3% 3% Risk Premium (Return-risk free return)/beta 6% -24% Standard Deviation 36% 41% Sharp Ratio (Trailling Return-3%)/standard deviationpremium                                     0.16 -     0.58 Question b. Sharp Ratio                                     0.16 -     0.58 Standard Deviation 36% 41% Risk free return 3% 3% M squared (S x sd + rf) 8.77% -20.80% Question c. Treynor ratio (rp-rf)/beta                                   0.058 -   0.183 Question d. r = rf + beta x (rm-rf) + alpha Where r is the actual return, rf is the portfolio return beta = volatility rm = market return Beta 1.3 1 Return 10.50% -20.80% Market Return (trailing return-3%)/beta +3% 8.77% -20.80% Alpha -2.97 -2.97

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