3 Question 3 (adjusted from CFA) A British pension fund has employed three investment managers, each of whom is responsible for investing in one-third of all asset classes so that the pension fund has a well-diversified portfolio. Information about the managers is given below Manager X Y Z Market (M) Risk-free rate (rf) Return 10% 11 12 o 20% 10 25 19 B 1.1 0.7 0.6 9 3 1. Calculate the required CAPM return, Sharpe ratio and Jensen's alpha for these portfolios and interpret all the results. 2. Let's now compute the ratio of excess returns of the above investments (as in the numerator of the Sharpe ratio) but instead of dividing over the the portfolios' risk, divide by their betas. This measure is called the Treynor ratio. In particular interpret the numbers that you find. How are these numbers different from those from the Sharpe ratios? hint: think of what B is capturing versus what a portfolio's risk (or more generally an investment's risk) is capturing| 3 Question 3 (adjusted from CFA) A British pension fund has employed three investment managers, each of whom is responsible for investing in one-third of all asset classes so that the pension fund has a well-diversified portfolio. Information about the managers is given below Manager X Y Z Market (M) Risk-free rate (rf) Return 10% 11 12 o 20% 10 25 19 B 1.1 0.7 0.6 9 3 1. Calculate the required CAPM return, Sharpe ratio and Jensen's alpha for these portfolios and interpret all the results. 2. Let's now compute the ratio of excess returns of the above investments (as in the numerator of the Sharpe ratio) but instead of dividing over the the portfolios' risk, divide by their betas. This measure is called the Treynor ratio. In particular interpret the numbers that you find. How are these numbers different from those from the Sharpe ratios? hint: think of what B is capturing versus what a portfolio's risk (or more generally an investment's risk) is capturing|