1. Following are four methods for calculating risk-adjusted performance: the Sharpe ratio, risk-adjusted return on capital (RAROC), return over maximum drawdown (RoMAD), and the Sortino ratio. Compare and contrast the measure of risk that each method uses. (6 Points)
2. Consider a $10 million portfolio of stocks. You perform a Monte Carlo simulation to estimate the VaR for this portfolio. You choose to perform this simulation using a normal distribution of returns for the portfolio, with an expected annual return of 14.8 percent and a standard deviation of 20.5 percent. You generate 700 random outcomes of annual return for this portfolio, of which the worst 40 outcomes are given below.

0.400 0.320 0.295 0.247

0.398 0.316 0.282 0.233

0.397 0.314 0.277 0.229

0.390 0.310 0.273 0.226

0.355 0.303 0.273 0.223

0.350 0.301 0.261 0.222

0.347 0.301 0.259 0.218

0.344 0.300 0.253 0.216

0.343 0.298 0.251 0.215

0.333 0.296 0.248 0.211

Using the above information, compute the following:

1. 5 percent annual VaR.
2. 1 percent annual VaR.

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Comparison of Risk Measures 1 Sharpe Ratio Measures the riskadjusted return of an investment relative to its volatility Uses standard deviation as a m... View the full answer