A B

Average return 20% 14%

T-Bill 4% 4%
St. Deviation of returns 30% 22%

1. Sharpe Ratio 0.53 0.45 Considering this computation, Fund A outperforms

2. A B
AuM (€ mn) 600.0 500.0 (AuM: Assets under Management)
Trading costs (€ mn) 21.0 5.0
Effective Tax charge (%) 38% 10%

Relative weight of
Trading costs 3.50% 1.00%

2.1 Ajusted returns 10.31% 11.70%

2.2 New Sharpe Ratio 0.21 0.35

After adjusting by trading costs and tax charges, fund B outperform fund A (considering Sharpe ratio as the perf
A B
Before adjustment 0.53 0.45
After adjustment 0.21 0.35

3 Fund B trading strategy implies relatively lower trading costs and low tax burden vs the Fund A trading strategy.
Considering empirical evidence, one candidate strategy for this is a strategy focused on larger market capitaliza
(1) Large Market Capitalizations: higher liquidity implying, for example, lower bid-ask spreads and lower price i
(2) Low dividend yields: less cash received as dividends implying lower tax paid.
mputation, Fund A outperforms Fund B: earned higher excess return per unit of total risk.

Management)

dering Sharpe ratio as the performance measure):

vs the Fund A trading strategy.

ed on larger market capitalizations with lower dividend yields.
-ask spreads and lower price impact;
 Actively Managed Actively Managed
Month Portfolio P Portfolio Q Market M
1 20% 37% 8%
2 22% 24% 10%
3 15% 18% 7%
4 11% 13% 6%
5 13% 8% 9%
2.1
1.1. Average Return 16.20% 20.00% 8.00%
1.2 Std. Deviation 4.17% 10.02% 1.41%
1.3 Beta 2.00 1.20 1.00

2.2
Actively Managed Actively Managed
Portfolio P Portfolio Q Market M
Average return 16.20% 20.00% 8.00%
Beta 2.00 1.20 1.00
Standard Deviation 4.17% 10.02% 1.41%
Tracking error (nonsystematic
risk), σ(e) 15% 25%

T- Bill (average during the period) 4%

P Q M 2.3
Sharpe Ratio 2.93 1.60 2.83
Jensen (alpha) 4.20 11.20
Treynor 6.10 13.33 4.00
Information Ratio 0.28 0.45
M2 computation
1. Adjusted portfolio P*
weight P 0.339 0.141
weight risk free asset 0.661 0.859
2. Return P* 8.14% 6.26%
M2 measure 0.14% -1.74%

2.4
2.4.a
2.4.b
2.4.c
P vs Market Q vs Market P vs Q
Outperformance vs Market Underperformance vs Market P outperforms Q
Q outperforms P
Outperformance vs Market Outperformance vs Market Q outperforms P
Q Outperforms P

Outperformance vs Market Underperformance vs Market P outperforms Q

P and Q represents the entire investment fund: P is preferable to Q due to its higher Sharpe Ratio and M2
P and Q compete as one of the possible subportfolios: Q is preferable to P due to its higher Treynor ratio
P and Q to be mixed with the index portfolio: Q is preferable due to its higher information ratio

This illustrates that the right way to evaluate a portfolio depends in large part on how portfolio fits in the
overall asset management context.
atio and M2