20102011
2012
2013
2014
2015
2016
2017
2018
2019
Total Return (p.a)
-24.00% -17.00%
32.70% 22.70%
-29.20% -21.20%
-10.60% -3.60%
-23.10% -20.10%
16.10% 11.10%
7.80%
12.80%
23.60% 15.60%
37.80% 27.80%
9.60%
13.60%
3.20%
4.14%
1.10%
1.10%
1.20%
1.70%
1.50%
1.00%
1.90%
1.20%
1.30%
1.70%
1.44%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total Return (p.a)
-24.00% -17.00%
32.70% 22.70%
-29.20% -21.20%
-10.60% -3.60%
-23.10% -20.10%
16.10% 11.10%
7.80%
12.80%
23.60% 15.60%
37.80% 27.80%
9.60%
13.60%
3.20%
4.14%
1.10%
1.10%
1.20%
1.70%
1.50%
1.00%
1.90%
1.20%
1.30%
1.70%
1.44%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total Return (p.a)
-24.00% -17.00%
32.70% 22.70%
-29.20% -21.20%
-10.60% -3.60%
-23.10% -20.10%
16.10% 11.10%
7.80% 12.80%
23.60% 15.60%
37.80% 27.80%
9.60% 13.60%
3.20%
4.14%
1.10%
1.10%
1.20%
1.70%
1.50%
1.00%
1.90%
1.20%
1.30%
1.70%
1.44%
Optimal Risky Portfolio
Stock Allocation Bond Allocation
Portfolio Return
0%
100.00%
6.00%
5%
95.00%
6.20%
10%
90.00%
6.40%
15%
85.00%
6.60%
20%
80.00%
6.80%
25%
75.00%
7.00%
30%
70.00%
7.20%
35%
65.00%
7.40%
40%
60.00%
7.60%
45%
55.00%
7.80%
50%
50.00%
8.00%
55%
45.00%
8.20%
60%
40.00%
8.40%
65%
35.00%
8.60%
70%
30.00%
8.80%
75%
25.00%
9.00%
80%
20.00%
9.20%
85%
15.00%
9.40%
90%
10.00%
9.60%
95%
5.00%
9.80%
100%
0.00%
10.00%
Portfolio Risk Sharpe Ratio
8.00%
0.375
7.26%
0.440923183
6.63%
0.512820513
6.12%
0.588475685
5.72%
0.664335664
5.44%
0.735632184
5.27%
0.796963947
5.22%
0.843315764
5.28%
0.871212121
5.46%
0.879523591
5.75%
0.869565217
6.16%
0.844498579
6.68%
0.808383234
7.32%
0.765288691
8.07%
0.718711276
8.94%
0.671328671
9.92%
0.625
11.02%
0.580894032
12.23%
0.539656582
13.56%
0.501567398
15.00%
0.466666667
Risk and Return Data
Risk Free Rate
E(rtn) Stocks
Volatility Stocks
E(rtn) bonds
Volatility Bonds
Correlation Between Stocks and Bonds
Optimal Risky Portfolio
Stock Allocation
Bond Allocation
Portfolio Return
Portfolio Risk
Sharpe Ratio
3.00%
10%
15%
6%
8%
25%
45%
55.00%
7.80%
5.46%
0.879523591
Based on the case, the actively managed fund produced a positive alpha. Alpha is a reliable measure of
the fund’s manager’s operations’ ability to generate excess returns compared to the S&P 500 benchmark.
Therefore, the positive alpha of 0.25 presents that the manager generated expected returns that were
beyond the fund’s beta. In general, regardless of the little alpha of 0.25%, the percentage value presents
that the manager managed risks effectively and generated excess returns over the 10 years of the analysis.
In general, I disagree with my colleague’s argument because an alpha of 0.25% is important for such an
1. On average, the managed fund produced returns of 10.25% which is greater compared to the 10%
performance of the S&P 500 benchmark. This presents that the funds had consistent outperformance over
theThe
10 years
of investment.
This
presents
the 0.25%
alpha
was meaningful
for the
analysis
2.
investment
was based
on 10
years that
showing
that it of
was
a long-term
investment.
Long-term
investments are characterized by the compounding effect where even small returns will accumulate and
give the investment final great investment. Therefore, this shows that the 0.25% return was meaningful
3.
forThe
the investment
investment.funds had a beta of 0.8. This value presents that it had a lower systemic risk compared
to the market. On the other hand, the fund manager achieved positive returns regardless of this risk value.
This brings forth the element of risk-adjusted performance. Achieving positive alpha while maintaining
low risk is a significant determinant of better performance of the manager.
The relationship presents that the market will have a perceived risk-reward trade-off and preferen
with higher risk adjusted returns. Based on these arguments, the relationship between the stocks
the reaction of the market would be decreased demand for Facebook (FB) and increased demand
Petroleum as compared to the other stocks (Generic Electric (GE) and CityGroup (C)) in the por
ward trade-off and preference for stocks
nship between the stocks suggests that
FB) and increased demand for British
CityGroup (C)) in the portfolio.
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