QUESTION 2 Table 1 and 2 below provide a summary of the performance indicators o
ID: 2328610 • Letter: Q
Question
QUESTION 2 Table 1 and 2 below provide a summary of the performance indicators of three portfolios and the market, (25) respectively: fable 1: Residual standard deviation (94) | enianean t Portfolios Expected return (%) | Beta Manager A Manager B Manager C 20 18 17 1.3 1.8 0.7 58 71 21 Table 2: Standard deviation Market portfolio Expected return (%) 96) 30 16 FTSE Top 40 T-bills 2.1 Calculate the expected excess returns, alpha values and residual variances of these portfolios. 2.2 Calculate the Sharpe measure for the three portfolios and the market. Comment on the performances of (15) (10) (10) these portfolios relative to the market.Explanation / Answer
2.1
Market rate of return: Rm=16 %
Risk free return Rf= 8% (since the Standard deviation of the T bills is Zero)
Market risk Beta= 30%
Calculation of Expected excess return:
calculation of Alpha values:
Alpha = Expected return - required return
Required return = Rf+Beta( Rm -Rf)
Calculation of Variances of Portfolios:
Beta square*Rm square+Ri square=
(1.3*1.3*16*16)+(20*20)
2.2
Calulation of Sharpe measures for all the portfolios:
Sharpe ratio = Ri - Rf/SD
As per ranking given in the above table shows the performance of the portfolios.According to sharpe ratio portfolio C is best in all three portfolios.
portfolio expected return Ri(%) Risk free returnRf(%) Excess Return(Ri-Rf)(%) A 20 8 12 B 18 8 10 C 17 8 9