COMPUTE HOW HNW HAS PERFORMED RELATIVE TO THE S&P 500. GRADIN...

500, compute how HNW has performed relative to the S&P 500. Grading GuideAnswer for Question 9-A Sharpe Ratio = HNW = S&P 500 = Sharpe → The HNW portfolio significantly underperformed the S&P 500. Treynor Measure = Treynor → The HNW portfolio only modestly underperformed the S&P 500. Candidate discussion: 2 points for correctly computing each of the measures. (Study Session 17, LOS 33.p) B. Day also performs a similar analysis on another portfolio. The other portfolio has a slightly positive alpha but significantly underperforms based on the M

²

ratio. Explain, in terms of systematic and unsystematic risk, what these ratios indicate. Answer for Question 9-B The ratios indicate the other portfolio has substantial unsystematic risk. Alpha is based on the CAPM. The CAPM is based on beta, a measure of systematic risk only. Consistent with the CAPM, most alphas are rather small and the return in the portfolio was largely explained by systematic risk. M

²

is based on standard deviation, a measure of both systematic and unsystematic risk. The poor M

²

but positive alpha indicates a large standard deviation, more than is accounted for by beta (systematic risk). Therefore, the portfolio has high unsystematic risk. 1 point for differentiating between systematic and unsystematic risk. 1 point for explaining which type of risk is relevant to each measure. 1 point for determining the portfolio has substantial unsystematic risk. C. Compute M

²

for the HNW portfolio. Explain, in terms of relative returns and volatility, the circumstances under which M

²

for HNW would equal M

²

for the market. Answer for Question 9-C M

²

Measure = R

F

+ (R

P

− R

F

) HNW = 4.4 + (28.2 − 4.4) = 15.0% The M

²

for any asset will only equal the M

²

for the market if it has the same level of excess return per total risk. That is, they will be the same if the Sharpe ratios are the same. 2 points for computing the measure. 1 point for explaining the requirements for the portfolio"s measure to equal the market. QUESTION 10 HAS TWO PARTS FOR A TOTAL OF 9 MINUTES Tom Groh is the President of Opportunity Banks. Opportunity has historically operated in the northeastern United States, with most of its business in Maryland, Delaware, and New Jersey. Opportunity has been in business since 1987 and has built its business on making mortgages and construction loans to residential developers. Opportunity has been very profitable, because developers value the services the bank provides. This allows Opportunity to price their construction loans with higher interest rates. Opportunity services and retains ownership of the its loans. It historically has had a near-zero leverage-adjusted duration gap. In the most recent fiscal year, Opportunity has experienced important changes in their business as follows: