Question

Consider the annual returns produced by two different active equity portfolio managers (A and B) as well as those to the stock index with which they are both compared:

Period	Manager A		Manager B		Index
1	13.4	%	13.8	%	11.5	%
2	-3.1		-4.2		-2.4
3	14.2		13.7		18.8
4	0.5		2.2		-0.9
5	-7.5		-5.9		-3.2
6	24.5		26.0		21.5
7	-11.0		-12.1		-13.7
8	5.2		5.4		5.7
9	3.6		3.5		2.3
10	19.0		18.0		19.7

A). Did either manager outperform the index, based on the average annual return differential that he or she produced relative to the benchmark? Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to two decimal places.

Manager A. __________%

Manager B. __________%

-Select-Manager A Manager B 's average return is less than the index and -Select-Manager A Manager B 's average exceeded that of the index.

B). Calculate the tracking error for each manager relative to the index. Which manager did a better job of limiting his or her client's unsystematic risk exposure? Do not round intermediate calculations. Round your answers to two decimal places.

Manager A: ________ %

Manager B: _________%

-Select-Manager A Manager B did the better job of limiting the client's exposure to unsystematic risk as the difference between manager's returns and those of the index has a -Select-larger smaller standard dev

Answer 1

The Average Annual Return Differential (AAR) for Market is = 59.30%

The AAR for A = 58.80%

The AAR for B = 60.40%

Yes, the fund B has outformed the market index since the average return is more than that of Index.

(b). Tracking error = Standard deviation of ( Fund - Market)

For Fund A = [(13.40-11.50) + (-3.10--2.40) + (14.20 - 18.80) + (0.50--0.90) + (-7.50--3.20) + (24.50-21.50) + (-11--13.70) + (5.20-5.70) + (3.60-2.3) + (19-19.70)]

=2.54

For Fund B = [(13.80-11.50) + (-4.20--2.40) + (13.70 - 18.80) + (2.20--0.90) + (-5.90--3.20) + (26-21.50) + (-12.10--13.70) + (5.40-5.70) + (3.50-2.3) + (18-19.70)]

=2.81

Since the SD of fund A is lower it has done a better job in reducing the risk.