Risk Adjusted Performance (RAP)

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Risk Adjusted Performance (RAP)

Postby swarnendupathak » Mon Sep 24, 2012 11:31 am

Hi, just came accross with Risk Adjusted performance measurement. Is there exist any specific formula to calulate RAP of a portfolio against its benchmark return??
Please help...

Regards
Swarnendu

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Risk Adjusted Performance (RAP)

Postby content.pristine » Mon Sep 24, 2012 1:39 pm

Hi,

Are you referring to ratios such as Sharpe Ratio, Treynor's Ratio, Jensen's Alpha, M-squared? These are risk adjusted portfolio measures..

8-)

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Risk Adjusted Performance (RAP)

Postby swarnendupathak » Mon Sep 24, 2012 2:26 pm

Hi, Please refer the below problem:
You have been asked to evaluate the performance of two hedge fund. GAM & IM, both are benchmerked to S&P 500 Index. The volatility of index is 17.50% & annualized perfoamance is 10.60%. Rf is 3.5%.
FUND Volatility Performance
GAM 24.50% 12.50%
IM 27.30% 13.60%
Which of the two funds have a higher relative risk-adjusted performance (RAP) & what is the RAP for that.
(a) IM 5.42%
(b) IM 1.18%
(c) GAM 4.85%
(d) GAM 6.16%,

Regards
Swarnendu

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Risk Adjusted Performance (RAP)

Postby content.pristine » Mon Sep 24, 2012 5:25 pm

Hi,

For this question, you need to use the Modigliani RAP or M-squared.
The RAP is given by:
(Rstock-Rmarket{(σmarketstock)} + Rf
For GAM, RAP = 4.85%
For IM, RAP = 5.42%

Hence, A is the correct answer..

Hope this helps..
8-)


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