Investments, tenth edition

  

  Portfolio   P  

  Market   M  

 Average return 

   35% 

 

  28% 

 Beta  

1.20  

1.00 

 Standard deviation 

   42% 

 

  30% 

 Tracking error 

(nonsystematic risk),  s (e)  

  18% 

 

  

0 

 Calculate the following performance measures for portfolio  P  and the market: Sharpe, Jensen (alpha), 

Treynor, information ratio. The T-bill rate during the period was 6%. By which measures did portfolio 

 P  outperform the market? 

 CONCEPT CHECK 

24.2 

  

11

 John R. Graham and Campbell R. Harvey, “Market Timing Ability and Volatility Implied in Investment Advi-

sors’ Asset Allocation Recommendations,” National Bureau of Economic Research Working Paper 4890, October 

1994. The part of this paper dealing with volatility-adjusted returns was ultimately published as “Grading the 

Performance of Market Timing Newsletters,”  

Financial Analysts Journal 

 53 (November/December 1997), 

pp. 54–66. Franco Modigliani and Leah Modigliani, “Risk-Adjusted Performance,”  Journal of Portfolio Manage-

ment,  Winter 1997, pp. 45–54. 

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7/25/13   3:13 AM

7/25/13   3:13 AM

Final PDF to printer

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P A R T   V I I

  Applied Portfolio Management