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 3%.

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.)

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.)

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

Jensen measure             

One-Year Trailing Returns Miranda Fund S&P 500 Return 10.3 % 21.0 % Standard deviation 34.0 % 39 % Beta 1.10 1.00

Explanation / Answer

Sharpe Ratio (SR) = (Returns - Rf) / SD, here, Rf - risk-free rate = 3%

For Miranda, SR = (10.30% - 3%) / 34% = 0.2147

For S&P500, SR = (-21% - 3%) / 39% = -0.6154

M2 = Rf + SR (Miranda) x SD (S&P) = 3% + 0.2147 x 39% = 11.37%

Treynor Ratio = (Returns - Rf) / Beta

For Miranda, Treynor = (10.30% - 3%) / 1.1 = 0.0664

For S&P500, Treynor = (-21% - 3%) / 1 = - 0.2400

Jensen measure = Returns (Miranda) - [Rf + beta (Miranda) x (Rm - Rf)]

= 10.30% - (3% + 1.1 x (-21% - 3%)) = 33.70%

Miranda S&P Returns 10.30% -21.00% S.D. 34% 39% Beta 1.1 1 Sharpe 0.2147 -0.6154 M2 11.37% Treynor 0.0664 -0.2400 Jensen 33.70%

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