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RR SFM - Performance Evaluation of Portfolio

The document consists of various financial problems related to portfolio evaluation, including calculations of Sharpe's ratio, Treynor's ratio, Jensen's index, and beta adjustments for different portfolios and funds. It also discusses the implications of changing capital structures and the use of CAPM for project evaluation in different industries. The document provides specific data for multiple portfolios and mutual funds, requiring analytical calculations and interpretations of performance metrics.

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RKSiranjeeviRaman
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48 views3 pages

RR SFM - Performance Evaluation of Portfolio

The document consists of various financial problems related to portfolio evaluation, including calculations of Sharpe's ratio, Treynor's ratio, Jensen's index, and beta adjustments for different portfolios and funds. It also discusses the implications of changing capital structures and the use of CAPM for project evaluation in different industries. The document provides specific data for multiple portfolios and mutual funds, requiring analytical calculations and interpretations of performance metrics.

Uploaded by

RKSiranjeeviRaman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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SFM – CMA FINAL www.rracademy.

in

SFM – Portfolio Evaluation


1. The Sharpe’s ratio and the Treynor’s ratio of first global fund are 0.20 and 4.50, respectively.
The correlation coefficient between returns of the fund and the market index is 0.75. What is
the standard deviation o24f the market index’s return?

2. Six portfolios experienced the following results during a seven year period:
Portfolio Average annual Standard Deviation Correlation with
Return market
A 18.6 27.0 0.81
B 14.8 18.0 0.65
C 15.1 8.0 0.98
D 22.0 21.2 0.75
E -9.0 4.0 0.45
F 26.5 19.3 0.63
Market 13.0 12.0
Risk free rate 9.0

Rank these portfolios using


(a) Sharpe’s method
(b) Treynor’s method
(c) Jensen’ s Method
(d) Fama’s Index.

3. Best and Excel are the two mutual funds. Best has a mean success of 0.15 and Excel has
0 .22. The Excel has double the beta of Best fund’s 1.50. The standard deviation of Best and
Excel funds are 15% and 21.43%. The mean return of market index is 12% and its standard
deviation id 7. The risk free rate is 8%.

i. Compute the Jensen Index for each fund


ii. Compute the Treynor and Sharpe Indices for the funds and interpret the results.

4. Suppose you are asked to analyse two portfolios having the following characteristics:

Stock Observed return Beta Residual variance


Portfolio A 0.18 2.0 0.03
Portfolio B 0.12 1.50 0.00

The risk-free rate is 0.07. The return on the market portfolio is 0.15. The standard deviation of
the market is 0.06.

a. Compute the Jensen Index for portfolio A and B.


b. Compute the Sharpe Index for the market portfolio
c. Compute the Sharpe Index for portfolios A and B.
d. Compute the Treynor Index for the portfolios A and B.

Prof. CA JAYASHREE PRAKASH 1


SFM – CMA FINAL www.rracademy.in

5. Consider the following data for a portfolio:


Return on market portfolio = 36.3%
Standard deviation of return on market = 18.45%
Return on the portfolio = 63.4%
Standard deviation of return on portfolio = 24.3%
Beta of portfolio = 1.13
Risk free return = 9.5%

You are required to


a. Compute
i. Return for total selectivity
ii. Return for extra diversifiable risk
b. Comment on the performance of the portfolio manager.

6. Calculate the reward – variability and reward – volatility ratio and rank the following if Risk
free rate is 7%:

Portfolio Return S.D. Beta


X 16 8 1.50
Y 12 6 0.90
Z 14 5 1.40
W 18 10 0.75
L 15 7 1.25

UN GEARING AND RE-GEARING OF BETA

1. The total value of equity share of R Company is Rs.60, 00,000 and the total value
of debt is Rs.40, 00,000. The treasurer estimates that the beta of the stock is
currently 1.5 and that the expected risk premium on the market is 10%. The
Treasury bill rate is 8%.

What is the beta of the equity share of R Company?

2. A Firm has an equity beta of 1.30 and is currently financed by 25% debt and 75%
equity. What will be the company’s new equity beta if the company changes its
financing policy to 33% and 67% equity? Assume corporate tax of 35%

3. E Ltd. is a frozen food packaging company and is looking to diversify its


activities into electronics business. The project it is considering has a return of
18%and E Ltd. is trying to decide whether the project should be accepted or not.
To help it decide it is going to use CAPM. The company has to find the proxy
beta for the project and has the following information on 3 companies in the
electronics business:

(a) Superior Limited:


Equity Beta – 1.33 Debt -50% Equity – 50%
(b) Admirable Limited:
Equity Beta – 1.30 Debt – 40% Equity – 60%

Prof. CA JAYASHREE PRAKASH 2


SFM – CMA FINAL www.rracademy.in

It has just taken on a totally unrelated project accounting for 20% of the company’s value that
has an asset beta of 1.40
(c) Meritorious Limited:
Equity Beta – 1.05 Debt – 35% Equity – 65%

Suggest whether the project can be accepted?

4. XYZ Ltd. is at present engaged in production of sports shoes and ahs a debt –
equity ratio of 0.80. Its present cost of debt is 14% and it has a marginal tax rate
of 60%. The company is proposing to diversify to a new field of adhesives which
is considerably different from the present line of operations. XYZ Ltd is not well
conversant with the new field. The company is not aware of the risk involved in
the area of adhesives but there exists another company PQR, which is a
representative company in adhesives. PQR is also a public limited company
whose shares are traded in the market. PQR has a debt equity ratio of 0.25 a beta
of 1.15 and an effective tax rate of 40%.

(a) Calculate what systematic risk is involved for XYZ Ltd, if the
company enters into the business of adhesives. You may assume
CAPM holds and XYZ employs the same amount of leverage.
(b) In case risk free rate at present is 10% and expected return on market
portfolio is 15%. What return XYZ Ltd. should require for the new
business if it uses CAPM approach?

5. Two companies are identical in all respects except the capital structure. One
company AB Ltd has a debt equity ratio of 1:4 and its equity has a beta of 1.1.
the other company XY Ltd has a debt equity ratio of 3:4 estimate the beta value
of XY Ltd. if the income tax rate is 30%

Prof. CA JAYASHREE PRAKASH 3

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