Question

Niki? Malone's portfolio earned a return of 11.6 % during the year just ended. The? portfolio's standard deviation of return was 14.2 %. The? risk-free rate is currently 5.9 %. During the? year, the return on the market portfolio was 9.2 % and its standard deviation was 9.7 %.

a.??Calculate? Sharpe's measure for Niki? Malone's portfolio for the year just ended.

b.??Compare the performance of? Niki's portfolio found in part a to that of Hector? Smith's portfolio, which has a? Sharpe's measure of 0.497. Which portfolio performed? better? ? Why?

c.??Calculate? Sharpe's measure for the market portfolio for the year just ended.

d.??Use your findings in parts a and c to discuss the performance of? Niki's portfolio relative to the market during the year just ended.

Answer 1

Sharpe ration = Excess Return per unit of risk = (Rp-Rf)/Standard Deviation

a. Sharpe Measure for Niki = (11.6%-5.9%)/14.2% = 0.401

b. Hector Smith SHarpe = 0.497

Since Sharpe tells us the excess return per unit of risk, Hector has had a higher Sharpe which means that it has performed better. Its return pe runit of risk was higher than that of Niki signifying that even if risk was higher, return was higher.

c. Sharpe of market =( 9.2-5.9)/9.7 = 0.340

d. Niki portfolio has performed much better than the market. though risk in market was lower, Niki portfolio even though has higher risk, return was also higher which compensated for the higher risk. Higher sharpe meand better performance