Visions
Student’s Name
Institutional Affiliation
Problem 1a:
In this question, I will use Jensen’s Alpha to determine which investor was the superior stock picker in this period.
A higher Jensen’s Alpha is preferred. Therefore, from the calculations above, the second investor was the superior stock picker since the second investor had a higher Jensen’s Alpha compared to the first investor by 1.
Problem 1b:
A higher value of the Sharpe ratio indicates a higher return gained by an investor when the risk increases. From the calculations of both investors, the second investor performs better than the first investor and therefore the second investor will be ranked above the first investor.
Problem 1c:
A higher market portfolio indicates a higher return having incurred some risk. Return of portfolio is directly proportional to market portfolio. Therefore, having a higher expected return of portfolio guarantees a higher market portfolio as shown in the calculations above. The second investor is having a higher market portfolio compared to the first investor, thus the second investor is performing better than the first investor.
Problem 2a:
Systematic risk:
Unsystematic risk:
Problem2b:
Calculating alpha values of the portfolios using Jensen’s alpha.
Problem 2c:
Calculating Sharpe ratio for the combinations:
The combination of portfolio Y and M gives the highest Sharpe ratio from the above calculations of each combination.
Problem 2d:
Calculating Sharpe ratio for the combination of X, Y and M:
Problem 3a:
Given
We define the rate of return as the corresponding rate
And it so holds that
But note that unlike fixed-income securities, here the rate ri is a random variable since r0i is assumed so.
The expected rate of return (also known as the mean or average rate of return) is given by ri = E(ri), and since r0i is assumed deterministic (non-random) it also holds that
Expected rate of return
The variance is,
Problem 3b:
Calculating Sharpe Ratio:
Problem 4a.
Which fund seems to have performed the best if
You are not a well-diversified investor? Justify.
Bergen strategic Allocation Fund (BSAF) seems to have performed the best. This is because it has a lower annual volatility compared to Oslo Enhanced Performance Fund (OEPF). Funds that are not well-Diversified tend to be risk averse and therefore avoid volatile investments. Therefore, a lower annual volatility indicates goods performance in a fund that is not well-diversified. Volatility indicates how risk are the investments that a fund is involved in. Funds that are not well-diversified prefer less risky investments to risky investments. Diversification is spreading of risk, if the risk is not spread then there is likelihood of great loss in case of failure.
You are a well-diversified investor and you believe the CAPM is the correct asset pricing model? Justify.
CAPM helps in measuring the risk involved in a certain investment. A higher risk involved indicates a higher return to be gained. Based on the information provided in the table, BSAF seems to perform better that OEPF since it has a higher CAPM beta indicating that a higher risk is involved and thus expecting a higher return. The aim of every fund is always to get a higher return, therefore, based on the risk involved; BSAP expects a higher return.
You consider the Fama-French 3-factor is the correct asset pricing model? Justify.
Using the Fama-French 3-factor, BSAF is also performing better than OEPF. According to Fama-French 3-factor, as the three factors decrease, performance increases and a fund outperforms. Therefore, BSAF factors are show as decreasing at a higher decreasing rate than that of OEPF.
Problem 4b:
HML factor helps to explain the spread of returns. OEPF has a positive HML factor while BSAF has a negative HML factor. The BSAF portfolio refer to a value fund whereas the OEPF is a growth fund. A zero values defines a growth portfolio while a value more than 0.3 is a vale fund.
Problem 4c:
In the absence of competition in the market, SMB is used to capture substantial time series variations in stock returns
Last Completed Projects
| topic title | academic level | Writer | delivered |
|---|