CFA Institute CFA-Level-III Exam - Topic 1 Question 3 Discussion

Question

HAS THREE PARTS One year has passed since HNW Advisors first started operations. Their overall equity portfolio has returned 28.2% versus a return of 22.4% for the S&P 500. The standard deviation of the S&P 500 is 20%, and Maggie Day, CFA, has estimated the standard deviation of HNW Advisor's equity portfolio at 45%. HNW Advisor's equity portfolio has a beta of 1.35, and the risk-free rate is 4.4%. A major HNW client is attempting to evaluate the relative performance of HNW's equity fund. The client is unsure whether the Sharpe measure or the Treynor measure is appropriate for the HNW portfolio.

Rolande · Accepted Answer

B) Assume that, using the Sharpe ratio to measure performance, the S&P 500 outperformed the HNW portfolio, but using the Treynor measure, the HNW portfolio outperformed the S&P 500. Explain, in terms of systematic and unsystematic risk, how this change in ranking could have occurred.

Rolande · Answer

A) Using the Sharpe and Treynor measures for the HNW portfolio and the S&P 500, determine how HNW has performed relative to the S&P 500.

Rolande · Answer

C) Compute M2 for the HNW portfolio, assuming management uses the market as a benchmark. Explain, in terms of relative returns and volatility, the circumstances under which M2 for HNW would equal M2 for the market.