Question

The following table provides information about the portfolio performance of three investment managers:

Manager	Return	Standard Deviation	Beta
A	25%	22%	2.1
B	21%	19%	1.5
C	15%	10%	0.8
Market (M)	15%	12%	Risk Free Rate = 5%

Complete the following table:

Manager	Expected Return	Sharpe Ratio	Treynor Ratio	Jensen’s Alpha
A
B
C
Rank

Answer 1

Answer:

Expected Return = Rf + (Rm-Rf) * beta

A:    5+ (15-5) * 2.1 = 26%
B: 5+ (15-5) * 1.5 = 20%
C: 5+ (15-5) * 0.8 = 13%

Ranking: A then B then C

Sharpe Ratio = (Rp -Rf) / S.D.

A: (25-5) / 22 = 0.909
B: (21-5) / 19 = 0.842
C: (15-5) / 10 = 1

Ranking: C then A then B

Treynor's Ratio = (Rp -Rf) / beta

A: (25-5) / 2.1 = 9.523
B: (21-5) / 1.5 = 10.67
C: (15-5) / 0.8 = 12.5

Ranking: C then B then A

Jensen's Alpha = Expected Return - Required Return

A: 26 - 25 = 1%
B: 20 - 21 = -1%
C: 13 - 15 = -2%

Positive Alpha indicates that stock is underpriced.
Negative Alpha indicates that stock is overpriced.