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Problem Set Week 5 Solutions
Problem Set Week 5 Solutions
2. A B
AuM (€ mn) 600.0 500.0 (AuM: Assets under Management)
Trading costs (€ mn) 21.0 5.0
Effective Tax charge (%) 38% 10%
Relative weight of
Trading costs 3.50% 1.00%
3 Fund B trading strategy implies relatively lower trading costs and low tax burden vs the Fund A trading strategy.
Considering empirical evidence, one candidate strategy for this is a strategy focused on larger market capitaliza
(1) Large Market Capitalizations: higher liquidity implying, for example, lower bid-ask spreads and lower price i
(2) Low dividend yields: less cash received as dividends implying lower tax paid.
mputation, Fund A outperforms Fund B: earned higher excess return per unit of total risk.
Management)
2.2
Actively Managed Actively Managed
Portfolio P Portfolio Q Market M
Average return 16.20% 20.00% 8.00%
Beta 2.00 1.20 1.00
Standard Deviation 4.17% 10.02% 1.41%
Tracking error (nonsystematic
risk), σ(e) 15% 25%
P Q M 2.3
Sharpe Ratio 2.93 1.60 2.83
Jensen (alpha) 4.20 11.20
Treynor 6.10 13.33 4.00
Information Ratio 0.28 0.45
M2 computation
1. Adjusted portfolio P*
weight P 0.339 0.141
weight risk free asset 0.661 0.859
2. Return P* 8.14% 6.26%
M2 measure 0.14% -1.74%
2.4
2.4.a
2.4.b
2.4.c
P vs Market Q vs Market P vs Q
Outperformance vs Market Underperformance vs Market P outperforms Q
Q outperforms P
Outperformance vs Market Outperformance vs Market Q outperforms P
Q Outperforms P
P and Q represents the entire investment fund: P is preferable to Q due to its higher Sharpe Ratio and M2
P and Q compete as one of the possible subportfolios: Q is preferable to P due to its higher Treynor ratio
P and Q to be mixed with the index portfolio: Q is preferable due to its higher information ratio
This illustrates that the right way to evaluate a portfolio depends in large part on how portfolio fits in the
overall asset management context.
atio and M2