1. The SP500 is a portfolio formed by 500 firms, hence, very diversified. Is it
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1. The SP500 is a portfolio formed by 500 firms, hence, very diversified. Is it true that suclh adiversified portfolio is immune to systematic risk? 2. Should WACC be calculated based on market or book values? 3. What is the alpha of a portfalio and why Fund managers try to have as high an alpha as they can? 4. The portfolio Axis Midcap offers an alpha of 12.08 and an R squared of 91.05. Explain what these measures mean 5. The portfolio Axis Midcap offers an alpha of 12.08, a beta of 0.94 and a Sharpe ratio of 1.22. The portfolio Axis Equity offers an alpha of 6.01, a beta of 0.89, and a Sharpe ratio of 1.07. Which portfolio would you pick and why? 6 During the recession beginning in 2008 the SP500 lost about 30% of its value. If diversification limits risk, how could such loss of value have happened? What is the difference between WACC and ROIC? 7.Explanation / Answer
1) False. A diversified portfolio is immune to non-systematic risk but is not immune to systematic or market risk.
2) WACC should always be calculated using market values.
3) Alpha of a portfolio is the difference in the returns of a portfolio over its benchmark.
4) Alpha has explained above is the difference of portfolio returns and benchmark. The portfolio outperformed its benchmark by 12.08%.
R squared is a measure a relationship between a portfolio and its benchmark. It measures how much movement in the fund is represented by the movement in the benchmark. In this case, 91.05% movement in the fund can be measured by the benchmark.
5) Alpha = Porfolio Returns - Benchmark Returns
Beta = Market risk of the portfolio. Higher the beta means higher the risk
Sharpe Ratio = (Portfolio Returns - Risk-free rate) / Std. Dev. is a measure of risk-adjusted returns.
I would select Axis Midcap as it has higher Sharpe Ratio than Axis Equity
6) During the same period, when the index lost about 30%, you could identify a number of stocks that would have lost over 50% to 90% in value. Hence, the diversification of S&P500 does limit risk.
7) WACC is the weighted average cost of capital, which is used in evaluating projects as a hurdle rate or discount rate. ROIC is the return on invested capital, is the measure of profitability of a firm.
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