Measure account for risk, Risk Management

The asset management industry uses a variety of "performance measures" to asses the relative performance of managed portfolios or funds, mostly (but not always) relative to an appropriate benchmark. One such measure, the "Sharpe ratio", was introduced in the  lectures. The "Treynor ratio" is defined in very much the same way, with the only exception that the denominator is not the portfolio's volatility ("sigma"), but instead it's  "beta" (i.e. the slope coefficient in a CAPM-style regression of portfolio returns onto a benchmark). Another performance measure used frequently is "alpha" (the intercept in the aforementioned regression). There are other measures (e.g. "M2" or the "Information  Ratio"); feel free to include any of these in your discussion at your discretion.

(a) Provide a discussion of the characteristics of these performance measures (and any others you may choose to include). Discuss in particular:

  • What exactly is being measured?
  • How does the measure account for risk (and what kind of risk)?
  • What are the differences between the measures?

(b) Discuss what performance measure(s) you would employ (and why?) if you were any of the following:

  • The manager of a "fund of funds", selecting a portfolio of funds.
  • A "high-net-worth" individual choosing a hedge fund to invest in.
  • An individual choosing a pension fund to invest their life savings.

(c) Below are two statements that we found in articles on performance measures.

Chose either one of these statements and provide a brief discussion:

 Statement (1):

 Investors use performance measures to decide where to drop their money. But clearly, since very few of us can see into the future, we are constrained to using historical (past) data to compute those measures. But investors probably do not care about how much they would have made if they had invested in the fund in the past, but how much they will make in the future if they invest now. The question is thus, how much does past performance tell us about future performance? Based on the empirical evidence, the answer seems to be: very little!

Posted Date: 2/22/2013 6:12:23 AM | Location : United States

Related Discussions:- Measure account for risk, Assignment Help, Ask Question on Measure account for risk, Get Answer, Expert's Help, Measure account for risk Discussions

Write discussion on Measure account for risk
Your posts are moderated
Related Questions
Here is a basic risky decision problem: Using the template below, sketch the results of a sensitivity analysis on P(Deal Succeeds) for a risk-neutral decision maker. How hi

A person is willing to sell some stock at Rs 500000 after one year from now. The risk free rate is 7% and the risk premium is estimated at 8%. I the person is intending to enter a

On September 25,2008 a portfolio worth $10 million consisting of investments in four stock indices: DJIA, FTSE 100, CAC 40 and NIKKEI 225. The value of the investment in each index

The Investment Committee is big on active management, and believes that there are areas/pockets of inefficiencies in the market. Knowing that you have taken Finance 455 at X-Univer

Risk Management The major risks involved in the implementation of syringe management plan include the following. Ideas to manage them are as well mentioned along with the risks

On successful completion of FSAP, the EC concluded that the EU FS industry still had strong untapped economic and employment growth potential. As a result, the White Paper on Finan

Question : Safety World Ltd is a new company that employs 110 people and provides contracting carpentry services to several organisations throughout the country. Some employe

In a report not to exceed five double-spaced typewritten pages, analyze the results obtained from the three simulations performed, identify the source of the differences, and selec

First's current stock price is $260. The price may rise to $300 or fall to $170 in one month. The risk-free interest rate is 18% per year. a. Using the replication portfolio app