As the team lead, you are required to evaluate the performance of two portfolio given the following
Question:
As the team lead, you are required to evaluate the performance of two portfolio given the following information for last 10 years:
Year portfolio A portfolio B
1 -1.50 -5.50
2 - 1.45 -3.50
3 -1.50 -1.50
4 -1.25 3.00
5 0.00 4.50
6 4.25 5.00
7 6.50 6.50
8 8.50 7.50
9 12.75 12.50
10 14.75 13.50
i.Calculate the (a) the average annual return, (b) the standard deviation of returns, and (c) the semi-deviation of returns for both portfolios.
ii.If the average annual T-bill rate during last decade sample period was 1.5 percent, what would be the Sharpe ratio for both portfolios. Which portfolio seems to have outperformed the other?
iii.If the average risk free rate (mentioned above) is minimum acceptable return required, find out the Sortino ratio for each portfolio. Now, which portfolio have performed better?
part b)
Your international Portfolio management team leader is confident that for the investor's required return estimation of a two stock portfolio, the most appropriate model is Fama French 3 factor model. Your firm's analyst report shows that the expected returns on SMB, HML, and KSE-100 index are 3.25%, 4.5% and 7% respectively. The T-bill's currently giving 2% return.
The relevant regression information about the two stocks ( , for both stock is 0, ignore terms) are given below as follows:
RA=Rrf+At+A1(RMtRrf)+A2RSMB+A3RHML+At
RB=Rrf+Bt+B1(RMtRrf)+B2RSMB+B3RHML+Bt
i.Find the required rate of return on each of the two stocks.
ii.If a two stocks (A & B) equally weighted portfolio is constructed, what is the maximum return expected based on your analysis in part i, show all the calculations?