You are an investment analyst tasked with evaluating the performance of a portfolio managed by Sarah, a portfolio manager for a large institutional investor. The portfolio's objective is to outperform the market index while carefully balancing risk. Over the past year, Sarah has made strategic decisions related to asset allocation, security selection, and sector allocation, which you must analyze to assess her effectiveness in managing the portfolio.

The following data summarizes the performance of the portfolio and the market index:

Portfolio return: 12%

Market return: 10%

Risk-free rate: 3%

Portfolio beta: 1.2

Portfolio standard deviation: 18%

Market standard deviation: 15%

Portfolio tracking error: 4%

In addition, Sarah's decisions regarding asset allocation, security selection, and sector selection contributed the following to the portfolio's performance:

Asset allocation contribution: 1.5% (due to allocation decisions between equity and bonds)

Security selection contribution: 2% (due to choosing stocks that outperformed the market within their respective sectors)

Sector selection contribution: 0.8% (due to overweighting/underweighting certain sectors compared to the benchmark)

Requirements:

As an analyst, your job is to assess Sarah's portfolio's performance using various metrics and performance attribution analysis.

1. Calculate Jensen's Alpha for Sarah's portfolio and interpret the result. (2 marks)

2. Calculate the Treynor Ratio and compare Sarah's risk-adjusted performance to the market. (2 marks)

3. Calculate the Information Ratio and interpret how effectively Sarah generated excess return relative to risk. (2 marks)

4. Evaluate Sarah's overall portfolio performance based on the calculated metrics and the contributions from asset allocation, security selection, and sector allocation. Identify which performance measure you find most useful in this case and justify your choice. (4 marks)