Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core larg
ID: 2752978 • Letter: K
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 96% and 4%, respectively. The risk-free rate of return was 3%. One-Year Trailing Returns Miranda Fund S&P 500 Return 9.5 % 21.8 % Standard deviation 36.0 % 41 % Beta 1.30 1.00 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.) Sharpe Ratios Miranda fund S&P 500 b. What is the M2 measure for Miranda? (Do not round intermediate calculations. Round your answer to 2 decimal places.) M2 Measure % 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.) Treynor Measure Miranda S&P 500 d. What is the Jensen measure for the Miranda Fund? (Do not round intermediate calculations. Round your answers to 4 decimal places.) Jensen measure
Explanation / Answer
Answer:a Sharpe ratio= rp-rf / Standard deviation p
S Miranda=0.095-0.03/0.36=18.06%
S S&P=-0.218-0.03/0.41=60.49%
Answer:b Calculation of the M2 measure for Miranda:
To compute M2 measure, blend the Miranda Fund with a position in T-Bills such that the “adjusted” portfolio has the same volatility as the market index. Using the data, the position in the Miranda Fund should be .41/.36= 1.13888 and the position in T-Bills should be 1 – 1.13888 = -.13888. (assuming borrowing at the risk free rate)
The adjusted return is: rp=(1.13888)*9.5%- (0.13888)*3%
=0.1081936-0.0041664
=10.40%
Calculate the difference in the adjusted Miranda Fund return and the benchmark:
M2=rp-rM
=10.40%-(-21.8%)=32.2%
Answer:c Treynor =rp-rf/Beta
T Miranda=0.095-0.03/1.30=5%
T S&P =-0.218-0.03/1.00=-24.8%
Answer:d calculation of the Jensen measure for the Miranda Fund:
Jensen=rp-[rf+beta(rm-rf)]
=9.5%-[3%+1.30(-21.8%-3%)]
=38.74%
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