Foundation of risk management

its.ruchi2006
Posts: 6
Joined: Tue Jul 16, 2013 5:33 pm

Foundation of risk management

Postby its.ruchi2006 » Wed Nov 06, 2013 6:29 am

A portfolio manager returns 10% with a volatility of 20%. The benchmark returns 8% with risk of 14%. The correlation between the two is 0.98. The risk-free rate is 3%. Which of the following statements is correct?
Choose one answer.
a. The portfolio has higher SR than the benchmark.
b. The portfolio has negative IR.
c. The IR is 0.35.
d. The IR is 0.29.

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

Foundation of risk management

Postby pradeeppdy » Thu Nov 14, 2013 6:39 am

Correct answer is D.
The Sharpe ratios of the portfolio and benchmark are (10%- 3%)/20% = 0.35, and (8%- 3%)/14% = 0.36, respectively. So, the SR of the portfolio is lower than that of the benchmark. Answer a) is incorrect. The TEV is the square root of 20%2 + 14%2 - 2 × 0.98 × 20%× 14%, which is sqrt(0.00472) = 6.87% So, the IR of the portfolio is (10%- 8%)/6.87% = 0.29


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