Question

You are the Fund Manager for a retiree pension fund. It’s after the year end and you are to undertake an evaluation of your stocks for the year ended 31 December 2019. You have already calculated the preliminary performance statistics and the same are summarized in the table below. Assume a risk-free rate of 4%.

	Stock 1	Stock 2	Stock 3	ALSI (Index)
AM (%)	10.3	10.2	9.5	10.1
SD (%)	18.4	15.3	12.6	15.0
Beta	1.05	0.75	0.36	1
SSD (%)	12.4	10.8	8.4	10.2

Required:

1. Assess the performance of the individual stocks for the year 2019 using the Jensen Alpha methodology.                                                                        [6 Marks]
2. Calculate and comment on the comparison of a Treynor’s ratio assessment to that of (a) above.                                                                                                [4 Marks]
3. Assuming 40% of the budget was invested in Stock 1 and 30% in Stock 2, determine the expected return of a portfolio comprising the three stocks.

[5 Marks]

4. Evaluate the performance of this portfolio with reference to its requited performance.                                                                                                      [5 Marks]

[TOTAL: 20

Answer 1

	Stock 1	stock 2	stock 3
alpha	-0.105	-2.05	6.58
Treynor	6	8.266667	15.27778

The alpha shows the difference between expected return and the fair return. A negative alpha indicates the security fails to generate returns at the same rate as the broader sector. By comparison, stock 3 is able to outperform the market and the rest two stocks generated negative alpha.

The Treynor ratio is a performance measure for determining how much excess return was generated for each unit of risk taken on by a portfolio.The ratio indicates a excees return over the risk free rate. All the stocks have generated significant returns over the risk free asset.

Portfolio return=

10.03

The portfolio return generated on par with the individual stock returns, but the difference is there will be lesser risk when compared to the individual stock risks.