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Seminar Questions Portfolio Performance Evaluation: Maliwanga Basilio R

The document presents a series of seminar questions focused on portfolio performance evaluation, covering various financial metrics and calculations for stocks and mutual funds. It includes questions on the performance of the FTSE 100, risk assessment of stocks, estimation of alpha values, and performance indices such as Sharpe and Treynor measures. Additionally, it discusses the implications of these evaluations for investors and financial managers.

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8 views3 pages

Seminar Questions Portfolio Performance Evaluation: Maliwanga Basilio R

The document presents a series of seminar questions focused on portfolio performance evaluation, covering various financial metrics and calculations for stocks and mutual funds. It includes questions on the performance of the FTSE 100, risk assessment of stocks, estimation of alpha values, and performance indices such as Sharpe and Treynor measures. Additionally, it discusses the implications of these evaluations for investors and financial managers.

Uploaded by

dqzrbp54s6
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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SEMINAR QUESTIONS

PORTFOLIO PERFORMANCE EVALUATION


QUESTION 1
You are given the following data which refers to the performance of the FTSE 100 and two companies over
the last financial year.
FTSE 100 Index at the end of 2004: 4753
FTSE 100 Index at the end of 2005: 5153
Dividend yield on the FTSE 100 for 2005: 4.55%
Current redemption yield for 7% Treasury Bills: 3.78%
Agape plc Beroya plc
Share price at 31 December 2004 201 260
Share price at 31 December 2005 224 307
Total dividend payment 8 9
Equity beta 1.3 0.87
Required: Using the data above, calculate whether or not a diversified investor with shareholdings in the two
companies will be satisfied with the returns they are receiving.
QUESTION 2
Currently, the risk-free rate is 10 percent and the expected return on the market portfolio is 15 percent. Market
analysts’ return expectations for four stocks are listed here, together with each stock’s expected beta.
No. Stock Expected Returns (%) Expected Beta
1. Stillman Zinc Corporation 17.0 1.3
2. Union Paint Company 14.5 0.8
3. National Automobile Company 15.5 1.1
4. Parker Electronics, Inc. 18.0 1.7
Required:
(a) If the analysts’ expectations are correct, which stocks (if any) are overvalued? Which (if any) are
undervalued?
(b) If the risk-free rate were suddenly to rise to 12 percent and the expected return on the market portfolio
to 16 percent, which stocks (if any) would be overvalued? Which (if any) undervalued? (Assume that the
market analysts’ return and beta expectations for our four stocks stay the same.)
QUESTION 3
Following information has been extracted by you regarding some companies listed on the Dar es Salaam
Stock Exchange:
Expected Equity Present Market Covariance
Returns (TZS. / Price (TZS. / Standard deviation of with market
Company Name share) share) ‘return % on equity’ return%
A Limited 3.25 18.00 6.3 32
B Limited 18.60 212.00 4.8 19
C Limited 0.80 4.50 4.7 24
D Limited 4.15 20.00 6.9 43
Market return has been estimated to be on average around 14.5% per annum (adjusted for the dividend
exclusion thereof) with a variance of 25%, whereas the risk-free rate is around 6% per annum.
Required:
(a) Estimate and interpret the ‘Alpha Values’ for each of the given companies.

Maliwanga Basilio R 1
(b) How will the analysis carried out in (a) above help you in deciding about investing in the stock market?

QUESTION 4
Assume the U.S dollar returns (monthly averages) shown in the following table for the three Baltic republics.
Market Mean return (R) Risk-free rate (Rf) Standard deviation (σ) Country Beta (β)
Estonia 1.12% 0.42% 16.00% 1.65
Latvia 0.75% 0.42% 22.80% 1.53
Lithunia 1.60% 0.42% 13.50% 1.20
Required: Calculate the Sharpe and Treynor measures of market performance.
QUESTION 5
An investor has a portfolio, which over the past few years has generated an annual average return of 11%
with standard deviation of 20%. Over the same period the market has generated an annual average return
of 13% with standard deviation of 14%. The risk-free rate has been fairly stable at 6% and the portfolio’s beta
is estimated at 0.7.
Required:
(i) Briefly explain the Sharpe ratio, Treynor’s measure and Jensen’s Alpha as used in measuring
performance of an asset or portfolio. (4.5 marks)
(ii) Calculate both the Treynor’s measure and the Sharpe ratio for the portfolio and the market. (2 marks)
(iii) Briefly explain whether the portfolio has underperformed, equaled or outperformance the market on risk
adjusted basis using the measures in part (ii) above. (1.5 marks)
QUESTION 6
You have purchased the following data from an investment bank:
Company Forecast Total equity Standard deviation of Covariance with
return (%) Total equity return (%) market return (%)
BDRC 16 6.3 32
MBN 12 4.8 19
CBN 14 4.7 24
BCD 19 6.9 43
The market return and market standard deviation are 14.5% and 5% respectively, and the risk-free rate is
6%. Returns and all other data relate to a one-year period.
Required:
(a) Estimate the ‘Alpha’ values for each of these companies’ shares and explain what use alpha values
might be to financial managers.
(b) Briefly discuss reasons for the existence of alpha values, and whether or not the same alpha values
would be expected to exist on one-year time.
QUESTION 7
The following information relates to two mutual funds operating in your country.
Omega Mutual Fund Beta Mutual Fund
Realised return 13% 18%
Beta 1.0 2.0
Standard deviation 19% 15%
Additional information:
1. The return on the market index is 12%.
2. The risk-free rate is 8%.

Maliwanga Basilio R 2
Required: For each of the above mutual funds, compute the following performance index scores:
(a) Jensen’s Alpha
(b) Treynor’s Alpha
(c) Sharpe Index for the funds and the market.

Maliwanga Basilio R 3

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