Consider the following historical performance data for two different portfolios, the Standard and Poor’s 500, and...

Consider the following historical performance data for two different portfolios, the Standard and Poor’s 500, and the 90-day T-bill.

Investment	Average Rate of		Standard
Vehicle	Return		Deviation		Beta	R2
Fund 1	26.80	%	21.42	%	1.427	0.739
Fund 2	13.52		14.30		0.944	0.722
S&P 500	15.90		12.80
90-day T-bill	6.20		0.60

Calculate the Fama overall performance measure for both funds. Round your answers to two decimal places.
Overall performance (Fund 1): %

Overall performance (Fund 2): %
What is the return to risk for both funds? Do not round intermediate calculations. Round your answers to two decimal places.
Return to risk (Fund 1): %

Return to risk (Fund 2): %
For both funds, compute the measures of (1) selectivity, (2) diversification, and (3) net selectivity. Do not round intermediate calculations. Round your answers to two decimal places. Use a minus sign to enter negative values, if any.

Selectivity Diversification Net selectivity

Fund 1 % % %

Fund 2 % % %

Solutions

Expert Solution

Overall performance measure for fund1= excess return - risk free rate= 26.8-6.2= 20.6%

Overall performance measure for fund2= excess return - risk free rate= 13.52-6.2=7.32%

Return to risk for Fund1 & 2

Return to risk for fund 1= beta*(market return- rsk free rate) = 1.427(0.159 - 0.062)= 13.84%

Return to risk for fund 2= beta*(market return- rsk free rate) = 0.944(0.159 - 0.062)= 9.156%

Selectivity = Excess Portfolio Return or overall performance measure - required return for risk

Selectivity1= 20.6-13.84= 6.76%

Selectivity2= 7.32-9.156= -1.836%

DIversification

Diversification = Return for total risk – Expected Return

Expected return 1= Risk free rate + beta*(market return- rsk free rate) = 0.062 + 1.427(0.159 - 0.062)= 0.2004 or 20.04%

Expected return 2= Risk free rate + beta*(market return- rsk free rate) = 0.062 + 0.944(0.159 - 0.062)= 0.1535 or 15.35%

Return for total risk = Risk free rate + Ratio of total risk (Market return – Risk free rate)

Ratio of total risk1 = Standard deviation of 1/ stadard deviation of market

Ratio of total risk2 = Standard deviation of 2/ stadard deviation of market

Return for total risk1= 0.062+(21.42/12.8)(0.159 - 0.062)= 22.43%

Return for total risk2= 0.062+(14.30/12.8)(0.159 - 0.062)= 17.03%

Diversificaion1= 22.43-20.04= 2.39%

Diversification2= 17.03-15.35= 1.68%

net selectivity

Net Selectivity = Selectivity – Diversification

Net selectivity1= 6.76-2.39= 4.37%

Net selectivity2= -1.38-1.68= -3.06%

jeff jeffy answered 1 year ago

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