A global equity manager | Business & Finance homework help

A global equity manager is assigned to select stocks from a universe of large stocks through out the world. The manager will be evaluated by comparing her returns to the return on the MSCI World Market Portfolio, but she is free to hold stocks from various countries in whatever proportions she finds desirable. Results for a given month are contained in the following table:

Country

Weight In
MSCI Index

Manager’s
Weight

Manager’s Return
in Country

Return of Stock Index
for That Country

U.K.

.15

.30

20%

12%

Japan

.30

.10

15

15

U.S.

.45

.40

10

14

Germany

.10

.20

5

12

a. Calculate the total value added of all the manager’s decisions this period.

b. Calculate the value added (or subtracted) by her country allocation decisions.

c. Calculate the value added from her stock selection ability within countries. Confirm that the sum of the contributions to value added from her country allocation plus security selection decisions equals total over- or underperformance.

Conventional wisdom says that one should measure a manager’s investment performance over an entire market cycle. What arguments support this convention? What arguments contradict it?

Does the use of universes of managers with similar investment styles to evaluate relative investment performance overcome the statistical problems associated with instability of beta or total variability?

During a particular year, the T-bill rate was 6%, the market return was 14%, and a portfolio manager with beta of .5 realized a return of 10%.

a. Evaluate the manager based on the portfolio alpha.

b. Reconsider your answer to part ( a ) in view of the Black-Jensen-Scholes finding that the security market line is too flat. Now how do you assess the manager’s performance?

Bill Smith is evaluating the performance of four large-cap equity portfolios: Funds A, B, C, and

D. As part of his analysis, Smith computed the Sharpe ratio and the Trey nor measure for all our funds. Based on his finding, the ranks assigned to the four funds are as follows:

Fund

Trey nor Measure Rank

Sharpe Ratio Rank

A

1

4

B

2

3

C

3

2

D

4

1

 

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