Chapter 18, Problem 16PS

Bill Smith is evaluating the performance of four large-cap equity portfolios: Funds A, B, C, and D. As part of his analysis, Smith computed the Sharpe ratio and Treynor's measure for all four funds. Based on his finding, the ranks assigned to the four funds are as follows:

Fund	Treynor Measure Rank	Sharpe Ratio Rank
A	$1$	$4$
B	$2$	$3$
C	$3$	$2$
D	$4$	$1$

The difference in rankings for Funds A and D is most likely due to:
a. A lack of diversification in Fund A as compared to Fund D.b. Different benchmarks used to evaluate each fund's performance.c. A difference in risk premiums. $\left(\text{L}0\text{ 18}-\text{2}\right)$
Use the following information to answer Problems 17 through 20: Prime Management CO. is looking at how best to evaluate the performance of its managers. Prime has been hearing more and more about benchmark portfolios and is interested in trying this approach. As such the company hired Sally Jones, CFA, as a consultant to educate the managers on the best methods for constructing a benchmark portfolio, how to choose the best benchmark, whether the style of the fund under management matters, and what they should do with their global funds in terms of benchmarking.

For the sake of discussion, Jones put together some comparative two-year performance numbers that relate to Primo’s current domestic funds under management and a potential benchmark.

	Weight		Return
Style Category	Prime	Benchmark	Prime	Benchmark
Large-cap growth	$0.\text{6}0$	$0.\text{5}0$	$\text{17}\%$	$\text{16}\%$
Mid-cap growth	$0.\text{15}$	$0.\text{4}0$	$\text{24}$	$\text{26}$
Small-cap growth	$0.\text{25}$	$0.\text{1}0$	$\text{2}0$	$\text{18}$

AS part of her analysis, Jones also takes a look at one of Primo’s global funds. In this particular portfolio, Prime is invested $\text{75}\%$in Dutch stocks and $\text{25}\%$in British stocks. The benchmark is invested $\text{5}0\%$in Dutch and and $\text{5}0\%$in British Stocks. On average the British stocks outperformed the Dutch stocks. The euro appreciated $\text{6}\%$versus the U.S. dollar over the holding period while the pound depreciated 2% versus the dollar. In terms of the local return, Prime outperformed the benchmark with the Dutch investments, but underperformed the index with respect to the British stocks.