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FINC 340: INVESTMENTSUNIT #2 WEEKLY WRITTEN ASSIGNMENTDIRECTIONS

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FINC 340: INVESTMENTSUNIT #2 WEEKLY WRITTEN ASSIGNMENTDIRECTIONS: Here is the Unit #2 Weekly Writing Assignment Answer Sheet thatyou should submit to your Unit #2 Homework Assignment Folder.Please submit your Unit #2 Writing Assignment in MS Word format with thefollowing file name: LastNameFirstInitial_Unit 02_Writing Assignmen.docx. Forexample, if you name is John Smith, the file name should beSmithJ_Unit02_Writing Assignment.docx.If you have any questions or comments, please do not hesitate to contact me.NAME: _____________________________________You are given the following information concerning several money market funds:Money MarketFundReturn in Excess of theTreasury Bill RateBetaA12.4%1.14B13.2%1.22C11.4%0.90D9.8%0.76E12.6%.095During the time period the Standard & Poor’s stock index exceeded the Treasury billrate by 10.5 % (i.e., rm – rf = 10.5%)a.Rank the performance of each fund without adjusting for risk and adjusting forrisk using the Treynor index. Which, if any, outperformed the market?(Remember, the beta of the market is 1.0).b.The analysis is part (a) assume each fund is su±ciently diversi²ed so that theappropriate measure of risk is the beta coe±cient. Suppose, however, thisassumption does not hold and the standard deviation of each fund’s return wasas follows:
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Money Market FundStandard Deviation ofReturnA0.045 (= 4.5%)B0.031C0.010D0.014E0.035Thus, Fund A earned a return of 12.4%, but approximately 68% of the time this returnhas ranged from 7.9% to 16.9%. The standard deviation of the market return is 0.01(i.e., 1 %), so 68 % of the time, the return on the market has ranged from 9.5 to11.5%. Rank the funds using this alternative measure of risk. Which, if anyoutperformed the market on a risk-adjusted basis?*Note: The Treynor Performance Index is an alternative measure for portfolioevaluation.Ti = Rp (realized return on the portfolio) – Rf (the risk-free rate) /b(Portfolio beta,the measure of systematic risk)Thus, if the portfolio manager X achieved a return of 15 percent when the risk-freerate was 7 percent the the portfolio’s beta was 1.1, the Treynor Index isTi = 0.15-0.07/1.1 =0.0727If portfolio manager Y achieved a return of 13.5 percent with a beta of 0.8, theTreynor Index isTi = 0.135 – 0.07 /0.8 =0.08125This indicates that portfolio manager Y outperformed portfolio manager X on a risk-adjusted basis.2
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