query on quants 1

deepakkrkanodia
Finance Junkie
Posts: 49
Joined: Thu Aug 09, 2012 4:45 pm

query on quants 1

Postby deepakkrkanodia » Thu Aug 09, 2012 4:46 pm

sir i have a query one one question on market returns

Q A manager is responsible for managing part of institutional portfolio to mimic the return on Nifty index. he is evaluated based on his ability to exactly
match the returns on the index. His portfolio holds 200 stocks but has exactly the same dividend yield as that of Nifty index portfolio. Which of the
statistical measures from this review would be an appropriate measure of his performance and how would you use it?



The correct answer was variance and std deviation of the differences btwn his portfolio returns and the return on index

sir, why is the answer not coefficient of variation and sharpe ratios as they compare risk return of portfolio. plz elaborate why answer is Variance and S.D,
and not sharpe ratio and C.V.

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pankaj
Finance Junkie
Posts: 61
Joined: Fri Aug 03, 2012 11:24 am

Re: query on quants 1

Postby pankaj » Fri Aug 10, 2012 10:46 am

Hi

The Sharpe Ratio measures the return per unit of risk. But here, the portfolio manager is not concerned with the risk at all. His performance is being evaluated only on the basis of his portfolio matching the target return (the return on the index in this case). His portfolio may be more or less risky than the market portfolio but he doesn't have to care about it if he is able to generate the target return.

Thus, our only criteria for judging his performance is how closely he has been able to match the target return, so the less he has deviated from the target the better, i.e. lesser is the deviation of the difference between portfolio return and target return from zero, the better it is. Thus, in order to ascertain this deviation we measure the variance or the standard deviation of this difference.

Therefore, there is no need to calculate Coeff. of Var. or Sharpe Ratio as risk never came into the picture!


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