Question

You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is 0.93.

Year	Fund		Market		Risk-Free
2011	–23.60	%	–44.50	%	1	%
2012	25.10		21.50		3
2013	14.40		15.40		2
2014	7.00		9.20		6
2015	–2.40		–6.20		2

Calculate Jensen’s alpha for the fund, as well as its information ratio. (Do not round intermediate calculations. Enter the alpha as a percent rounded to 2 decimal places. Round the ratio to 4 decimal places.)

	Jensen’s alpha % Information ratio

Answer 1

Year	Portfolio realized return		Market realized return		risk free rate
2011	-23.6		-44.5		1
2012	25.1		21.5		3
2013	14.4		15.4		2
2014	7		9.2		6
2015	-2.4		-6.2		2
average realized return = Using average function in MS excel	4.1	average market return = Using average function in MS excel	-0.92	average risk free rate = Using average function in MS excel	2.8
Standard deviation- Using STDEVP function in MS excel	16.522954	Standard deviation- Using STDEVP function in MS excel	23.65801
beta = (standard deviation of portfolio/standard deviation of market)*correlation between portfolio return & market return	0.6495197
Alpha = R(i) - (R(f) + B x (R(m) - R(f)))		4.1-(2.8+.6495*(-.92-2.8))	3.72
Year	Portfolio realized return	Market realized return	difference in return
2011	-23.6	-44.5	20.9
2012	25.1	21.5	3.6
2013	14.4	15.4	-1
2014	7	9.2	-2.2
2015	-2.4	-6.2	3.8
STANDARD DEVIATION OF DIFFERENC IN RETURN = TRACKING ERROR = Using STDEVp function in MS excel			8.295155
Information ratio = (portfolio return-index return)/tracking error	(portfolio return-market return)/tracking error	4.1-(-.92) / 8.295	0.605184