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Moreover despite the fact that the bond index

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Moreover, despite the fact that the bond index underperformed both the actuarial return and T-bills, Alpine outperformed both. Alpine’s performance within each asset class has been superior on a risk-adjusted basis. Its overall disappointing returns were due to a heavy asset allocation weighting towards bonds, which was the Board’s, not Alpine’s, choice. 24-7
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e. A trustee may not care about the time-weighted return, but that return is more indicative of the manager’s performance. After all, the manager has no control over the cash inflows and outflows of the fund. 14. a. Method I does nothing to separately identify the effects of market timing and security selection decisions. It also uses a questionable “neutral position,” the composition of the portfolio at the beginning of the year. b. Method II is not perfect, but is the best of the three techniques. It at least attempts to focus on market timing by examining the returns for portfolios constructed from bond market indexes using actual weights in various indexes versus year-average weights. The problem with this method is that the year- average weights need not correspond to a client’s “neutral” weights. For example, what if the manager were optimistic over the entire year regarding long-term bonds? Her average weighting could reflect her optimism, and not a neutral position. c. Method III uses net purchases of bonds as a signal of bond manager optimism. But such net purchases can be motivated by withdrawals from or contributions to the fund rather than the manager’s decisions. (Note that this is an open- ended mutual fund.) Therefore, it is inappropriate to evaluate the manager based on whether net purchases turn out to be reliable bullish or bearish signals. 15. Treynor measure = (17 – 8)/1.1 = 8.182 16. Sharpe measure = (24 – 8)/18 = 0.888 17. a. Treynor measures Portfolio X: (10 – 6)/0.6 = 6.67 S&P 500: (12 – 6)/1.0 = 6.00 Sharpe measures Portfolio X: (10 – 6)/18 = 0.222 S&P 500: (12 – 6)/13 = 0.462 Portfolio X outperforms the market based on the Treynor measure, but underperforms based on the Sharpe measure. b. The two measures of performance are in conflict because they use different measures of risk. Portfolio X has less systematic risk than the market, as measured by its lower beta, but more total risk (volatility), as measured by its higher standard deviation. Therefore, the portfolio outperforms the market based on the Treynor measure but underperforms based on the Sharpe measure. 24-8
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18. Geometric average = (1.15 × 0.90) 1/2 – 1 = 0.0173 = 1.73% 19. Geometric average = (0.91 × 1.23 × 1.17) 1/3 – 1 = 0.0941 = 9.41% 20. Internal rate of return = 7.5% 21. d. 22. Time-weighted average return = (15% + 10%)/2 = 12.5% To compute dollar-weighted rate of return, cash flows are: CF 0 = $500,000 CF 1 = $500,000 CF 2 = ($500,000 × 1.15 × 1.10) + ($500,000 × 1.10) = $1,182,500 Dollar-weighted rate of return = 11.71% 23. b. 24. a.
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