FIN3IPM – PORTFOLIO MANAGEMENT

WORKSHOP 9 SOLUTIONS

ANALYSIS OF PERFORMANCE
Question 1

An investor has placed her funds with a fund manager.

• She initially invests $160,000.
• A year later, at the end of Year 1, the portfolio has grown in value to $210,000.
• At the end of Year 1, she invests another $40,000.
• During Year 2 the portfolio loses $30,000 in value.
• At the end of Year 2, the investor invests another $60,000.
• At the end of Year 3, the portfolio is worth $350,000.

(a) What is the value of the return from the point of view of the investor?
The best measure for this purpose is the money weighted return. This can be done in a
spreadsheet as follows:

(b) What is the value of the return from the point of view of the portfolio manager?
The best measure for this purpose is the time weighted return.
VE 210,000
R1 = −1= − 1 = 31.25%
VB 160,000
VE 220,000
R2 = −1= − 1 = −12%
VB 250,000
VE 350,000
R3 = −1= − 1 = 25%
VB 280,000

TR = (1 + 0.3125 )(1 − 0.12 )(1 + 0.25 ) − 1 = 44.375%

(1+ R )
3
p = 1.44375  Rp = 1.443751/3 − 1 = 13.02%
Question 2

The following table shows the expected return, standard deviation and beta for 3 exchange traded funds
(ETFs). ETF A consists solely of investments in shares, ETF B consists solely of investments in bonds, and
ETF C is a Real Estate Investment Trust. The table also shows information relating to the market portfolio
and risk-free asset.

Asset E(R) Std Dev Beta

A 12% 32% 1.2
B 5% 12% 0.8
C 9% 10% 1.4
Market 8% 15% 1
RF 3% 0 0

(a) Complete the table by entering values into the missing cells. (See above.)
(b) For each ETF, calculate the following ratios, using the formulas provide.

i. Sharpe ratio
Rp − RF 0.12 − 0.03
Sharpe ratio = SR A = = 0.281
σp 0.32

0.05 − 0.03 0.09 − 0.03

SRB = = 0.167 SRC = = 0.600
0.12 0.1

ii. Treynor ratio

Rp − RF 0.12 − 0.03
Treynor ratio = TR A = = 0.075
βp 1.2

0.05 − 0.03 0.09 − 0.03

TRB = = 0.025 TRC = = 0.043
0.8 1.4

iii. Jensen’s alpha

α = Rp − RF + βp ( RM − RF )  α A = 0.12 − 0.03 + 1.2 ( 0.08 − 0.03 )  = 3%

α B = 0.05 − 0.03 + 0.8 ( 0.08 − 0.03 )  = −2%

αC = 0.09 − 0.03 + 1.4 ( 0.08 − 0.03 )  = −1%

iv. M2

M 2 = RF + σ M / σ p  ( Rp − RF )

M 2A = 0.03 + 0.15 / 0.32  ( 0.12 − 0.03 ) = 7.22%

M 2B = 0.03 + 0.15 / 0.12  ( 0.05 − 0.03 ) = 5.50%

M 2C = 0.03 + 0.15 / 0.10  ( 0.09 − 0.03 ) = 12.00%

Question 3

Rank the ETFs from highest to lowest value for each of the four ratios in Question 2.

Ranking Sharpe Treynor Jensen’s Alpha M2

Highest C A A C
A C C A
Lowest B B B B

Question 4

See the Working File Solutions for solutions to Question 4.

Download the spreadsheet “Topic 9 Working File” from the LMS.

(a) Calculate the ratios from Question 2 using Excel.

Portfolio X comprises a combination of ETFs A and B. The table in the Excel file lists 6 different versions for
Portfolio X, with the weight of ETF A varying from 0% to 100% in increments of 20%.

(b) Complete the table, calculating:

• the weight of ETF B,
• the expected return, and
• the standard deviation
for each version of Portfolio X.

(c) Create an Excel chart showing the investment opportunity set for Portfolio X.
(Hint: Use a scatter plot to graph the values of risk and return for each version of Portfolio X.)

(d) Calculate the Sharpe ratio for each version of Portfolio X.

(e) Determine the optimal weight of ETFs A and B in Portfolio X.

Question 5
Screenshots from LSEG Workspace have been uploaded to the LMS which will provide the information
needed to answer the following questions.

Screenshot 1 – iShares Core S&P/ASX 200 ETF Performance

(a) What is the 1 Year return on this ETF? 8.94%

(b) What is the 1 Year return on the S&P/ASX 200 Total Return Index (shown in
9.07%
purple under the header “FM”)?

Screenshot 2 – iShares Core S&P/ASX 200 ETF Chart compared to the S&P/ASX 200 Index

(c) What do you observe? Are there periods over the past year when the fund has matched,
underperformed or outperformed the index?

The fund outperformed the index for the first 6 months, matched the index for about the next 5
months and has underperformed for the last month.

Screenshot 3 – iShares Core S&P/ASX 200 ETF Technical Analysis

(d) Insert the performance measures for the ASX 200 ETF in the table below

Screenshot 4 – BetaShares Australian Small Companies ETF Performance

(e) What is the 1 Year return on this ETF? 5.16%

(f) What is the 1 Year return on the S&P/ASX Small Ordinaries Total Return
7.36%
Index (shown in purple)?

Screenshot 5 – BetaShares Australian Small Companies ETF Technical Analysis

(g) Insert the performance measures for the ASX 200 ETF in the table below

Performance Measure ASX 200 ETF ASX Small Ords ETF

Alpha -0.07% -0.15
Annualised Standard Deviation 12.03% 14.15%
Beta 1.00 0.92
Sharpe Ratio 0.10 0.01
Treynor Ratio 0.36 0.06

(h) Have small stocks outperformed or overperformed over the last

Underperformed
year, compared to large stocks?

The return on small stocks is less than for large stocks, the risk is higher (as measured by
standard deviation, but not by beta), and the Alpha, Sharpe Ratio and Treynor Ratio are all
lower.