Module 5 : Practical Problems (Risk Adjusted Returns)

Q3.1

Fund Return SD Risk-free rate of return Beta

A 18.00% 3.00% 10.00% 0.5
B 24.00% 7.00% 10.00% 0.1

Comment on the performance of the funds using Sharpe Index & Treynor Index ?

Ans 5.1

Sharpe Ratio = Rp - Rf / SD

Sharpe Ratio for Fund A

18-10 / 3
8/3
2.67
Sharpe Ratio for Fund B
24-10 / 7
14 / 7
2.00

As per sharpe ratio Fund A is a better option than Fund B

Treynor Ratio = Rp - Rf / Beta

Treynor Ratio for Fund A

18-10 / .5
8 / .5
16.00
Treynor Ratio for Fund B
24-10 / .1
14 / .1
140.00

As per sharpe ratio Fund B is a better option than Fund A

Q5.2

Fund Return SD Risk-free rate of return Beta

A 12.00% 18.00% 7.00% 0.7
B 19.00% 25.00% 7.00% 1.3
M ( Market ) 15.00% 20.00% 7.00% 1

Comment on the performance of the funds using Sharpe Index & Treynor Index ?
Q5.3

Particulars Portfolio P Market (M)

Average Return 24.00% 15.00%

Beta 1.2 1

SD 30.00% 24.00%

The risk-free rate during the period was 8%

Calculate risk adjusted return measures for the above mentioned portfolio and market index
Q5.4

Consider the following information for mutual funds L, M & N and the market index

Funds Mean Returns (%) SD (%) Beta

L 24 22 1.8

M 16 14 1.2

N 12 13 .8

Market 10 10 1

The risk free rate is 7%. Calculate Treynor,Sharpe and Jensen’s Alpha for the given mutual
funds and the market index
Q5.5 The following table gives the detail regarding the expected return, beta and residual
variance of the individual securities

Security Expected Returns (Ri) Beta (𝛃) Residual variance (σei2)

A 15 1 30

B 12 1.5 20

C 11 2 40

D 8 .8 10

E 9 1 20

F 14 1 10

The t-bill rate is 5% and the market variance is 10 . What is the optimum portfolio?

Ranking the securities

Selecting cut off rate

Security Ci