Kelli Blakely is a portfolio manager for the Miranda Fund, a core large-cap equi

Question

Kelli Blakely is a portfolio manager for the Miranda Fund, 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. However, 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 97% and 3%, respectively. The risk-free rate of return was 2%.

What are the M 2 measures for Miranda and the S&P 500? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

One-Year Trailing Returns Miranda Fund S&P 500 Return 10.2 % - 22.5 % Standard deviation 37 % 44 % Beta 1.10 1.00

Explanation / Answer

M2 measure = Rf + (Rp - Rf) / SDp x SDm

Here, Rf - Risk-free rate = 2%, Rp - Miranda Returns = 10.20%, SDp - Std. Dev. of Miranda = 37%, SDm - Std. Dev. of S&P500 = 44%

=> M2 measure = 2% + (10.2% - 2%) / 37% x 44% = 11.75%

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