Dear David,
I think I've done a few practice questions on performance analysis but this is really the first time I've heard of Risk Adjusted Performance ratio when doing question 47 (appended at the end) from Annotated II Power Practices, a ratio that doesn't require the parameters that are normally required, such as beta, alpha. When I study through your answer, I couldn't understand what this ratio is. Unlike Sharpe ratio and Treynor ratio that can be traced back to CAPM, I also don't understand where it originates from.
Thank you very much for your enlightenment!
Cheers!
Liming 17/11/09
Question 47:
You have been asked to evaluate the performance of two hedge funds: Global Asset Management I and International Momentum II. Both are benchmarked to MSCI EAFE. Which of the two funds had a higher relative Risk Adjusted Performance (RAP) last year, and what is the RAP?
The volatility of EAFE is 17.5% and the annualized performance is 10.6%. The risk‐free rate is 3.5%.
Your Answer: 47. CORRECT: C
The annualized risk adjusted performance is σm/ σp(Rp - Rm) + Rf = σm - benchmark volatility σp - portfolio volatility Rp- portfolio return Rm - benchmark return Rf - risk‐free return
The risk adjusted performance for Global is then σm/ σp(Rp - Rm) + Rf = 17.5/24.5 x (12.5 - 10.6) + 3.5 = 4.85% The risk adjusted performance for International is then σm/ σp(Rp - Rm) + Rf = 17.5/27.3 x (13.6 - 10.6) + 3.5 = 5.42%. International has a greater RAP. Reference: Grinold, Kahn, Chapters 14, 17.
I think this answer given is incorrect.
The RAP is given by excess return * benchmark volatility/portfolio volatiltiy + riskfree rate, or: Sharpe ratio * benchmark volatility + riskfree rate
The answer given substitutes an excess return with Rp - Rb, which doesn’t make sense. (perhaps the RAP is meant to be relative to the benchmark entirely, but then the risk free rate should be replaced in both cases)
RAP (GAM) = Sharpe 0.376 * 17.5% + 3.5% = 9.93% RAP (IM II) = Sharpe 0.370 * 17.5% + 3.5% = 9.97%
I think I've done a few practice questions on performance analysis but this is really the first time I've heard of Risk Adjusted Performance ratio when doing question 47 (appended at the end) from Annotated II Power Practices, a ratio that doesn't require the parameters that are normally required, such as beta, alpha. When I study through your answer, I couldn't understand what this ratio is. Unlike Sharpe ratio and Treynor ratio that can be traced back to CAPM, I also don't understand where it originates from.
Thank you very much for your enlightenment!
Cheers!
Liming 17/11/09
Question 47:
You have been asked to evaluate the performance of two hedge funds: Global Asset Management I and International Momentum II. Both are benchmarked to MSCI EAFE. Which of the two funds had a higher relative Risk Adjusted Performance (RAP) last year, and what is the RAP?
The volatility of EAFE is 17.5% and the annualized performance is 10.6%. The risk‐free rate is 3.5%.
Your Answer: 47. CORRECT: C
The annualized risk adjusted performance is σm/ σp(Rp - Rm) + Rf = σm - benchmark volatility σp - portfolio volatility Rp- portfolio return Rm - benchmark return Rf - risk‐free return
The risk adjusted performance for Global is then σm/ σp(Rp - Rm) + Rf = 17.5/24.5 x (12.5 - 10.6) + 3.5 = 4.85% The risk adjusted performance for International is then σm/ σp(Rp - Rm) + Rf = 17.5/27.3 x (13.6 - 10.6) + 3.5 = 5.42%. International has a greater RAP. Reference: Grinold, Kahn, Chapters 14, 17.
I think this answer given is incorrect.
The RAP is given by excess return * benchmark volatility/portfolio volatiltiy + riskfree rate, or: Sharpe ratio * benchmark volatility + riskfree rate
The answer given substitutes an excess return with Rp - Rb, which doesn’t make sense. (perhaps the RAP is meant to be relative to the benchmark entirely, but then the risk free rate should be replaced in both cases)
RAP (GAM) = Sharpe 0.376 * 17.5% + 3.5% = 9.93% RAP (IM II) = Sharpe 0.370 * 17.5% + 3.5% = 9.97%
