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

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.
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.
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.
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.

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

Actual exam question for CFA Institute's CFA-Level-III exam
Question #: 3
Topic #: 1
[All CFA-Level-III Questions]

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.

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Suggested Answer: B

by Rolande at May 07, 2022, 05:33 PM

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Lorean
8 months ago
Wait, how can the rankings change just based on risk measures?
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Wynell
8 months ago
Totally agree, Treynor might tell a different story though.
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Marica
9 months ago
I doubt the Sharpe ratio will show HNW outperforming.
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Callie
9 months ago
But with a beta of 1.35, isn't it riskier than the S&P?
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Paris
9 months ago
HNW's portfolio returned 28.2%, that's impressive!
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Daryl
9 months ago
Hmm, I'm a bit confused about the difference between managing permissions at the Key level versus the KeyRing level. I'll need to think through the implications of each approach carefully.
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Royal
9 months ago
This question seems straightforward. I think the benefit of Veritas Extension for Oracle Disk Manager is reduced system call overhead, so I'll go with option A.
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