Consider the information shown in the table below and answer the questions that
ID: 2721251 • Letter: C
Question
Consider the information shown in the table below and answer the questions that follow.
Matt’s Portfolio
Julie’s Portfolio
Total portfolio return
12%
15%
Portfolio standard deviation
10%
16%
Portfolio Beta
1.1
1.9
Risk-Free Rate
4%
Market Return
10%
a. Calculate Sharpe’s measure for Matt and for Julie. Show work and express the answers as decimals rounded to two decimal places.
b. Calculate Treynor’s measure for Matt and for Julie. Show work and express the answers as percentages rounded to two decimal places.
c. Calculate Jensen’s alpha for Matt and for Julie. Show work and express the answers as unrounded percentages.
d. Explain why Matt’s portfolio would be considered better than Julie’s portfolio, even though Julie’s had a higher return. In other words, WHY are the measures higher for Matt than for Julie? You may give your explanation by completing the following sentence: Julie had a higher return than Matt, but Julie…
Matt’s Portfolio
Julie’s Portfolio
Total portfolio return
12%
15%
Portfolio standard deviation
10%
16%
Portfolio Beta
1.1
1.9
Risk-Free Rate
4%
Market Return
10%
Explanation / Answer
Details Matt Portfolio Julie's Portfolio Total portfolio return 12.0% 15.0% Portfolio std deviation 10.0% 16.0% Portfolio Beta 1.10 1.90 Risk Free rate 4% 4% Market Return 10% 10% a Sharpe Measure =(total portfolio return-Risk free rate)/Std deviation of Portfolio 0.80 0.69 b Treynor's Measure ==(total portfolio return-Risk free rate)/Portfolio Beta 7.27% 5.79% c Jensen's Alpha=Total Portfolio Return-Risk Free Rate-[Portfolio Beta*(Market Return-Risk Free Rate)] 1.40% -0.400% d Sharpe Ratio measures the risk premium of the portfolio over the portfolio risk and Treynors Ratio measures the risk premium of the portfolio over the sytematic risk. The jensen's index measures the excess return of the portfolio over the expected return as measured by beta. As all the ratios are higher for Matt's portfolio , the same is considered better than Julie's though Julie has a higher portfolio return. The main reason are the higher std deviation and beta of Julie's Portfolio that made the ratios dowm compared to that of Matt's