You would like to use a two-factor model to evaluate the performance of an activ

Question

You would like to use a two-factor model to evaluate the performance of an actively managed mutual fund, the Hyperactive Fund. You have historical monthly excess returns that an investor in this fund would have earned, and you also have historical excess returns on two passively managed portfolios, Steady One and Steady Two. (The excess return on an asset is defined as the asset's rate of return minus the return on a riskless asset.) You have estimated the following average monthly excess returns as well as the sensitivities of each portfolio's rate of return to the two factors Sensitivity to Factor 0.5 Portfolio Average Excess Return 018 Sensitivity 1 to Factor 2 Steady 1 Steady 2 Hyperactive 0.5 .023 Compute and interpret a measure of performance for the Hyperactive Fund Suppose that you were to use the traditional CAPM-based Jensen measure to evaluate performance. If the Jensen measure for Steady 1 was .02 and the Jensen measure for Hyperactive was .01, what, if anything, would you conclude about the performance of Hyperactive? Explairn a. b.

Explanation / Answer

a) We can measure the ratio of excess return to the product of the two sensitivity terms

Steady 1 ; 0.018/(05*1) = 3.6%

Steady 2 ; .013 / (1 * 0.5) = 2.6%

Hyp ; .023 /(1*1) = 2.3%

By this measure, steady 1 is the best performing because of good return despite low sensitivity.

b) Hyperactive has underperformed steady 1. The expected return purely due the riskiness of hyperactive was exceede by only 1%, whereas steady1 exceeded by 2%.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.