Question

In: Finance

You work for a private wealth management firm that follows an “external investment” model, whereby it...

You work for a private wealth management firm that follows an “external investment” model, whereby it decides which outside managers it should recommend to clients. One mutual fund that is a candidate for inclusion on your Premier Recommended List of approved managers is Active Fund (AFNDX), an actively managed stock portfolio benchmarked to the Standard & Poor’s 500 (SPX) Index. You have been asked to perform an evaluation of AFNDX’s past investment performance, using a sample of monthly returns on the following positions: (1) AFNDX portfolio, (2) SPX Index, (3) U.S. Treasury bills, and (4) the three primary Fama–French risk factors (excess market, SMB, and HML). These data are listed below.

Monthly Return Data for AFNDX, SPX, T-Bill, and Fama–French Factors

% RETURNS TO: F-F FACTOR % RETURNS:

Month AFNDX SPX Index T-Bill (RF) Excess Mkt SMB HML

1 9.257 2.765 0.410 0.960 -4.020 4.620

2 7.586 7.549 0.410 6.170 -3.460 0.080

3 -2.113 -1.981 0.450 -1.600 3.140 1.080

4 5.082 6.250 0.450 4.860 -1.590 -2.530

5 -1.751 0.778 0.380 -0.490 -2.540 4.820

6 -5.034 -4.097 0.440 -4.880 -0.320 3.850

7 4.064 5.955 0.430 3.810 -5.130 -1.210

8 8.069 6.087 0.490 6.640 4.630 -4.090

9 3.395 4.479 0.360 4.060 1.370 0.830

10 6.896 7.958 0.430 7.210 -2.370 -0.700

11 0.302 -5.596 0.410 -4.050 7.450 0.910

12 3.075 5.482 0.440 5.360 2.590 -0.390

13 -1.625 -3.337 0.410 -3.820 -0.940 2.520

14 -2.922 4.621 0.380 2.730 -5.050 1.050

15 0.449 1.721 0.470 1.310 -2.330 3.590

16 -1.054 1.107 0.430 0.020 -1.010 -1.670

17 8.564 7.214 0.380 6.880 0.290 -1.220

18 3.804 5.118 0.390 4.740 -1.460 1.910

19 0.723 1.014 0.420 0.660 0.420 0.220

20 -2.563 -1.713 0.400 -2.960 -3.620 4.290

21 4.647 4.066 0.410 2.860 -3.400 -1.530

22 -1.800 -1.057 0.410 -2.710 -4.500 -1.800

23 -17.074 -14.444 0.420 -16.110 -5.920 5.690

24 15.720 6.403 0.470 5.950 0.030 -3.770

25 -3.536 8.134 0.320 7.100 -3.360 -2.860

26 3.587 6.052 0.320 5.870 1.360 -3.690

27 10.020 5.764 0.390 5.940 -0.310 -4.950

28 6.638 4.171 0.340 3.480 1.160 -6.150

29 -4.197 -3.098 0.350 -4.140 -5.580 1.660

30 5.422 4.001 0.430 3.320 -3.820 -3.030

31 0.811 3.879 0.380 4.480 2.890 2.810

32 -3.514 -2.352 0.330 -2.400 3.470 3.080

33 4.736 5.554 0.390 4.710 3.430 -4.340

34 -0.750 -3.119 0.390 -3.440 2.010 0.690

35 -1.879 -0.505 0.380 -1.360 -1.170 -1.270

36 -1.193 -2.746 0.400 -2.690 3.230 -3.170

37 7.071 6.318 0.380 5.800 -6.520 -3.190

38 2.437 2.032 0.360 3.200 7.700 -8.100

39 10.064 5.889 0.430 7.820 6.990 -9.040

40 -3.853 -5.025 0.410 -4.420 4.070 -0.150

41 5.788 -1.890 0.440 2.540 21.500 -12.020

A. For both AFNDX and SPX, calculate the series of monthly risk premia (stated returns in excess of the risk-free rate) for the 41-month sample period. Use these excess return data to compute the Sharpe ratio for both AFNDX and SPX. Do not round intermediate calculations. Round your answers to three decimal places.

Sharpe ratio for AFNDX: ______

Sharpe ratio for SPX: ________

B. Based on a regression of the excess returns to AFNDX on the excess returns to SPX, use regression analysis to calculate the active manager’s (1) one-factor Jensen’s alpha coefficient, (2) beta coefficient, and (3) R-squared measure. Briefly explain what each of these statistics tells you about how AFNDX has been managed. Do not round intermediate calculations. Round your answers to four decimal places.

Jensen’s alpha coefficient: ________

The value indicates that the manager generated a [higher or lower] return than what was expected given the portfolio’s risk level.

Beta coefficient: _______

The fund is only slightly [more or less] volatile than the market.

R-squared measure: ________

C.Using your work in parts (a) and (b), calculate the Treynor ratio performance measures for both AFNDX and SPX, assuming a beta coefficient of 1.00 for the latter. Do not round intermediate calculations. Round your answers to three decimal places.

Treynor ratio for AFNDX:_________

Treynor ratio for SPX:________

Expert Solution

Part A) As in the Part A of the Question it has been asked to find sharp ratios using calculated Risk premium which is given on monthly basis therefore in order to arrive at a single sharp ratio the average of calculated risk premium has been taken otherwise there would have been monthly sharp ratios

Part C)

jeff jeffy answered 2 years ago

You are an Investment Advisor with a Wealth Management firm. One of your clients has approached...

You are an Investment Advisor with a Wealth Management firm. One of your clients has approached you for investing Rs. 10 Lacs for one year. He is a conservative investor and would like to protect his principal. He is considering buying a stock that is currently trading at Rs 800/- but is worried about the downside risk. The yield on one-year government bonds is 8% pa. Call options with strike prices of Rs. 800 and Rs 830 are trading at...

You work for a large investment management firm. The analysts with your firm have made the...

You work for a large investment management firm. The analysts with your firm have made the following forecasts for the returns of stock A and stock B: Probability Stock A Stock B very very weak 10.00% 65.00% -65.00% Weak 15.00% 30.00% -20.00% Moderate 30.00% 25.00% 35.00% strongly Moderate 20.00% 15.00% 40.00% Strong 15.00% -20.00% 45.00% Very Very Strong 10.00% -55.00% 65.00% 100.0% Answer the following questions: Calculate the expected returns, variance and the standard deviations for stock A and B....

You work for a small investment management firm. You have been provided with the following historical...

You work for a small investment management firm. You have been provided with the following historical information for three stocks and the market index. The information is shown in the table below. AAA Inc. BBB Inc. CCC Inc. Stock Price Dividend Stock Price Dividend Stock Price Dividend Market Index 2012 $47 $125 $145 20,840 2013 $52 $1.40 $135 $1.50 $160 $3.50 23,320 2014 $57 $1.40 $103 $1.55 $170 $3.60 22,220 2015 $62 $1.70 $130 $1.65 $185 $3.65 25,325 2016...

Scenario: You work for an investment banking firm and have been asked by management of Vestor...

Scenario: You work for an investment banking firm and have been asked by management of Vestor Corporation (not real), a software development company, to calculate its weighted average cost of capital, to use in evaluating a new company investment. The firm is considering a new investment in a warehousing facility, which it believes will generate an internal rate of return of 11.5%. The market value of Vestor's capital structure is as follows: Source of Capital Market Value Bonds $10,000,000 Preferred...

8.) You graduate from college and start work. You establish an investment plan whereby you contribute...

8.) You graduate from college and start work. You establish an investment plan whereby you contribute $165 from each of your monthly paychecks and get 5.25% interest compounded monthly. You have your first payment payroll deducted and deposited into the IRA (individual retirement account) at the end of your first month's work. If you intend to work for 45 years, what will be the value of this investment when you retire? Show work

You are a wealth management analyst, and your first job is to make investment recommendations to...

You are a wealth management analyst, and your first job is to make investment recommendations to a client. After extensive research, you have narrowed down to the following two companies: XiG, pronounced as “eleven groceries”, is a grocery store chain operated in the U.S, with major competitor such as convenience store Seven-Eleven. XiG has very stable consumer base and its business is not very sensitive to the business cycle of the general economy. TanW, acronym for Tan-my- way, is a...

Problem Four (15 marks) You work for a small investment management firm. You have been provided...

Problem Four You work for a small investment management firm. You have been provided with the following historical information for three stocks and the market index. The information is shown in the table below. AAA Inc. BBB Inc. CCC Inc. Stock Price Dividend Stock Price Dividend Stock Price Dividend Market Index 2012 $35 $1.20 $110 $0.45 $100 $1.50 10,840 2013 $40 $1.40 $120 $0.50 $85 $1.50 11,320 2014 $45 $1.40 $98 $0.55 $95 $1.60 12,220 2015 $50 $1.70 $115...

Discuss the management objectives of a firm governed by the shareholder wealth maximization. For example, in...

Discuss the management objectives of a firm governed by the shareholder wealth maximization. For example, in the United States, the decision to shift production from a local factory to a foreign one may be based on the change of the NPV value as a result of such move. The owners may have only minor consideration concerning the impact that such change would have on the community and/or local employees. Explain your point of view carefully.

Question 4 (25 marks) You work in an audit firm who acts as the external auditor...

Question 4 You work in an audit firm who acts as the external auditor of ABC Trading Limited. The audit partner has asked you to carry out audit procedures in relation to the cut off assertion and to verify the inventory quantities at the end of the financial year. All information about inventory is kept in a computerized system, called inventory control. Relevant information in relation to quantities is being updated in the computerized system using the GRNs and sales...

Brandon is an analyst at a wealth management firm. One of his clients holds a $5,000...

Brandon is an analyst at a wealth management firm. One of his clients holds a $5,000 portfolio that consists of four stocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in the following table: Stock Investment Allocation Beta Standard Deviation Atteric Inc. (AI) 35% 0.750 53.00% Arthur Trust Inc. (AT) 20% 1.400 57.00% Li Corp. (LC) 15% 1.200 60.00% Baque Co. (BC) 30% 0.500 64.00% Brandon calculated the portfolio’s beta as...