ESSEN.OF.INVESTMENTS+CONNECT
ESSEN.OF.INVESTMENTS+CONNECT
10th Edition
ISBN: 9781260361605
Author: Bodie
Publisher: MCG
Question
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Chapter 18, Problem 17PS
Summary Introduction

(a)

To calculate:

We have to collect the data as given in Connect and calculate each fund's excess return.

Expert Solution
Check Mark

Explanation of Solution

Excess returns are calculated as shown below. Period chosen is from 2004 to 2008.

    Total monthly returns

    Excess Returns

    Month

    Vanguard

    Value Fund

    S&P

    T-bills

    Vanguard

    Value Fund

    S&P

    Jan-04

    1.52

    -0.07

    1.35

    0.07

    1.45

    -0.14

    1.28

    Feb-04

    -0.53

    -0.99

    -1.32

    0.06

    -0.59

    -1.05

    -1.38

    Mar-04

    -2.69

    -2.46

    -1.89

    0.09

    -2.78

    -2.55

    -1.98

    Apr-04

    0.22

    2.52

    1.70

    0.08

    0.14

    2.44

    1.62

    May-04

    2.53

    1.39

    1.85

    0.06

    2.47

    1.33

    1.79

    Jun-04

    -1.93

    -7.46

    -3.22

    0.08

    -2.01

    -7.54

    -3.30

    Jul-04

    0.99

    -0.78

    0.25

    0.1

    0.89

    -0.88

    0.15

    Aug-04

    1.52

    2.49

    1.00

    0.11

    1.41

    2.38

    0.89

    Sep-04

    0.21

    1.46

    1.29

    0.11

    0.10

    1.35

    1.18

    Oct-04

    5.22

    4.66

    4.46

    0.11

    5.11

    4.55

    4.35

    Nov-04

    3.24

    3.60

    3.01

    0.15

    3.09

    3.45

    2.86

    Dec-04

    -2.36

    -3.48

    -2.24

    0.16

    -2.52

    -3.64

    -2.40

    Jan-05

    3.62

    0.79

    2.09

    0.16

    3.46

    0.63

    1.93

    Feb-05

    -2.33

    -2.86

    -1.83

    0.16

    -2.49

    -3.02

    -1.99

    Mar-05

    -2.68

    -2.41

    -1.87

    0.21

    -2.89

    -2.62

    -2.08

    Apr-05

    4.08

    7.13

    3.22

    0.21

    3.87

    6.92

    3.01

    May-05

    2.25

    0.51

    0.15

    0.24

    2.01

    0.27

    -0.09

    Jun-05

    3.55

    5.28

    3.82

    0.23

    3.32

    5.05

    3.59

    Jul-05

    -1.85

    -0.85

    -0.93

    0.24

    -2.09

    -1.09

    -1.17

    Aug-05

    0.38

    1.34

    0.80

    0.3

    0.08

    1.04

    0.50

    Sep-05

    -1.88

    0.30

    -2.36

    0.29

    -2.17

    0.01

    -2.65

    Oct-05

    2.87

    5.04

    4.39

    0.27

    2.60

    4.77

    4.12

    Nov-05

    0.93

    0.46

    -0.19

    0.31

    0.62

    0.15

    -0.50

    Dec-05

    3.41

    3.30

    2.41

    0.32

    3.09

    2.98

    2.09

    Jan-06

    0.00

    -1.82

    0.57

    0.35

    -0.35

    -2.17

    0.22

    Feb-06

    0.71

    0.34

    1.65

    0.34

    0.37

    0.00

    1.31

    Mar-06

    0.53

    -0.45

    1.26

    0.37

    0.16

    -0.82

    0.89

    Apr-06

    -3.00

    -5.84

    -3.01

    0.36

    -3.36

    -6.20

    -3.37

    May-06

    -0.27

    -1.55

    0.26

    0.43

    -0.70

    -1.98

    -0.17

    Jun-06

    1.09

    -2.36

    0.45

    0.4

    0.69

    -2.76

    0.05

    Jul-06

    2.70

    3.60

    2.18

    0.4

    2.30

    3.20

    1.78

    Aug-06

    2.63

    2.87

    2.70

    0.42

    2.21

    2.45

    2.28

    Sep-06

    2.56

    1.92

    3.16

    0.41

    2.15

    1.51

    2.75

    Oct-06

    0.75

    1.94

    1.99

    0.41

    0.34

    1.53

    1.58

    Nov-06

    2.32

    0.22

    0.77

    0.42

    1.90

    -0.20

    0.35

    Dec-06

    1.86

    2.18

    1.51

    0.4

    1.46

    1.78

    1.11

    Jan-07

    -2.30

    -1.69

    -1.96

    0.44

    -2.74

    -2.13

    -2.40

    Feb-07

    0.81

    0.89

    1.16

    0.38

    0.43

    0.51

    0.78

    Mar-07

    3.87

    2.92

    4.42

    0.43

    3.44

    2.49

    3.99

    Apr-07

    3.65

    3.37

    3.39

    0.44

    3.21

    2.93

    2.95

    May-07

    -2.02

    -1.14

    -1.46

    0.41

    -2.43

    -1.55

    -1.87

    Jun-07

    -4.74

    -0.79

    -3.13

    0.4

    -5.14

    -1.19

    -3.53

    Jul-07

    1.12

    1.11

    1.28

    0.4

    0.72

    0.71

    0.88

    Aug-07

    2.54

    4.91

    3.88

    0.42

    2.12

    4.49

    3.46

    Sep-07

    0.39

    2.19

    1.35

    0.32

    0.07

    1.87

    1.03

    Oct-07

    -5.86

    -3.90

    -3.87

    0.32

    -6.18

    -4.22

    -4.19

    Nov-07

    0.25

    0.00

    -1.13

    0.34

    -0.09

    -0.34

    -1.47

    Dec-07

    -5.39

    -10.34

    -6.04

    0.27

    -5.66

    -10.61

    -6.31

    Jan-08

    -2.67

    -2.38

    -2.58

    0.21

    -2.88

    -2.59

    -2.79

    Feb-08

    -0.89

    -0.06

    -0.90

    0.13

    -1.02

    -0.19

    -1.03

    Mar-08

    5.64

    6.32

    4.77

    0.17

    5.47

    6.15

    4.60

    Apr-08

    1.44

    3.00

    1.51

    0.17

    1.27

    2.83

    1.34

    May-08

    -7.18

    -6.25

    -8.35

    0.17

    -7.35

    -6.42

    -8.52

    Jun-08

    -1.80

    -0.40

    -0.90

    0.17

    -1.97

    -0.57

    -1.07

    Jul-08

    1.37

    0.45

    1.55

    0.15

    1.22

    0.30

    1.40

    Aug-08

    -7.50

    -11.63

    -9.42

    0.12

    -7.62

    -11.75

    -9.54

    Sep-08

    -18.16

    -15.45

    -16.52

    0.15

    -18.31

    -15.60

    -16.67

    Oct-08

    -7.16

    -7.93

    -6.96

    0.08

    -7.24

    -8.01

    -7.04

    Nov-08

    2.70

    0.57

    0.99

    0.02

    2.68

    0.55

    0.97

    Dec-08

    -10.76

    -4.49

    -8.22

    0.09

    -10.85

    -4.58

    -8.31

Conclusion

Excess returns have been shown in the spread sheet.

Summary Introduction

(b)

To calculate:

In this part of the problem we have to calculate standard deviation of each fund.

Expert Solution
Check Mark

Explanation of Solution

Standard deviation on excel can be calculated by using formula as = stdev
Then we have to choose the data accordingly to calculate standard deviation.

    Total monthly returns

    Excess Returns

    Month

    Vanguard

    Value Fund

    S&P

    T-bills

    Vanguard

    Value Fund

    S&P

    Jan-04

    1.52

    -0.07

    1.35

    0.07

    1.45

    -0.14

    1.28

    Feb-04

    -0.53

    -0.99

    -1.32

    0.06

    -0.59

    -1.05

    -1.38

    Mar-04

    -2.69

    -2.46

    -1.89

    0.09

    -2.78

    -2.55

    -1.98

    Apr-04

    0.22

    2.52

    1.70

    0.08

    0.14

    2.44

    1.62

    May-04

    2.53

    1.39

    1.85

    0.06

    2.47

    1.33

    1.79

    Jun-04

    -1.93

    -7.46

    -3.22

    0.08

    -2.01

    -7.54

    -3.30

    Jul-04

    0.99

    -0.78

    0.25

    0.1

    0.89

    -0.88

    0.15

    Aug-04

    1.52

    2.49

    1.00

    0.11

    1.41

    2.38

    0.89

    Sep-04

    0.21

    1.46

    1.29

    0.11

    0.10

    1.35

    1.18

    Oct-04

    5.22

    4.66

    4.46

    0.11

    5.11

    4.55

    4.35

    Nov-04

    3.24

    3.60

    3.01

    0.15

    3.09

    3.45

    2.86

    Dec-04

    -2.36

    -3.48

    -2.24

    0.16

    -2.52

    -3.64

    -2.40

    Jan-05

    3.62

    0.79

    2.09

    0.16

    3.46

    0.63

    1.93

    Feb-05

    -2.33

    -2.86

    -1.83

    0.16

    -2.49

    -3.02

    -1.99

    Mar-05

    -2.68

    -2.41

    -1.87

    0.21

    -2.89

    -2.62

    -2.08

    Apr-05

    4.08

    7.13

    3.22

    0.21

    3.87

    6.92

    3.01

    May-05

    2.25

    0.51

    0.15

    0.24

    2.01

    0.27

    -0.09

    Jun-05

    3.55

    5.28

    3.82

    0.23

    3.32

    5.05

    3.59

    Jul-05

    -1.85

    -0.85

    -0.93

    0.24

    -2.09

    -1.09

    -1.17

    Aug-05

    0.38

    1.34

    0.80

    0.3

    0.08

    1.04

    0.50

    Sep-05

    -1.88

    0.30

    -2.36

    0.29

    -2.17

    0.01

    -2.65

    Oct-05

    2.87

    5.04

    4.39

    0.27

    2.60

    4.77

    4.12

    Nov-05

    0.93

    0.46

    -0.19

    0.31

    0.62

    0.15

    -0.50

    Dec-05

    3.41

    3.30

    2.41

    0.32

    3.09

    2.98

    2.09

    Jan-06

    0.00

    -1.82

    0.57

    0.35

    -0.35

    -2.17

    0.22

    Feb-06

    0.71

    0.34

    1.65

    0.34

    0.37

    0.00

    1.31

    Mar-06

    0.53

    -0.45

    1.26

    0.37

    0.16

    -0.82

    0.89

    Apr-06

    -3.00

    -5.84

    -3.01

    0.36

    -3.36

    -6.20

    -3.37

    May-06

    -0.27

    -1.55

    0.26

    0.43

    -0.70

    -1.98

    -0.17

    Jun-06

    1.09

    -2.36

    0.45

    0.4

    0.69

    -2.76

    0.05

    Jul-06

    2.70

    3.60

    2.18

    0.4

    2.30

    3.20

    1.78

    Aug-06

    2.63

    2.87

    2.70

    0.42

    2.21

    2.45

    2.28

    Sep-06

    2.56

    1.92

    3.16

    0.41

    2.15

    1.51

    2.75

    Oct-06

    0.75

    1.94

    1.99

    0.41

    0.34

    1.53

    1.58

    Nov-06

    2.32

    0.22

    0.77

    0.42

    1.90

    -0.20

    0.35

    Dec-06

    1.86

    2.18

    1.51

    0.4

    1.46

    1.78

    1.11

    Jan-07

    -2.30

    -1.69

    -1.96

    0.44

    -2.74

    -2.13

    -2.40

    Feb-07

    0.81

    0.89

    1.16

    0.38

    0.43

    0.51

    0.78

    Mar-07

    3.87

    2.92

    4.42

    0.43

    3.44

    2.49

    3.99

    Apr-07

    3.65

    3.37

    3.39

    0.44

    3.21

    2.93

    2.95

    May-07

    -2.02

    -1.14

    -1.46

    0.41

    -2.43

    -1.55

    -1.87

    Jun-07

    -4.74

    -0.79

    -3.13

    0.4

    -5.14

    -1.19

    -3.53

    Jul-07

    1.12

    1.11

    1.28

    0.4

    0.72

    0.71

    0.88

    Aug-07

    2.54

    4.91

    3.88

    0.42

    2.12

    4.49

    3.46

    Sep-07

    0.39

    2.19

    1.35

    0.32

    0.07

    1.87

    1.03

    Oct-07

    -5.86

    -3.90

    -3.87

    0.32

    -6.18

    -4.22

    -4.19

    Nov-07

    0.25

    0.00

    -1.13

    0.34

    -0.09

    -0.34

    -1.47

    Dec-07

    -5.39

    -10.34

    -6.04

    0.27

    -5.66

    -10.61

    -6.31

    Jan-08

    -2.67

    -2.38

    -2.58

    0.21

    -2.88

    -2.59

    -2.79

    Feb-08

    -0.89

    -0.06

    -0.90

    0.13

    -1.02

    -0.19

    -1.03

    Mar-08

    5.64

    6.32

    4.77

    0.17

    5.47

    6.15

    4.60

    Apr-08

    1.44

    3.00

    1.51

    0.17

    1.27

    2.83

    1.34

    May-08

    -7.18

    -6.25

    -8.35

    0.17

    -7.35

    -6.42

    -8.52

    Jun-08

    -1.80

    -0.40

    -0.90

    0.17

    -1.97

    -0.57

    -1.07

    Jul-08

    1.37

    0.45

    1.55

    0.15

    1.22

    0.30

    1.40

    Aug-08

    -7.50

    -11.63

    -9.42

    0.12

    -7.62

    -11.75

    -9.54

    Sep-08

    -18.16

    -15.45

    -16.52

    0.15

    -18.31

    -15.60

    -16.67

    Oct-08

    -7.16

    -7.93

    -6.96

    0.08

    -7.24

    -8.01

    -7.04

    Nov-08

    2.70

    0.57

    0.99

    0.02

    2.68

    0.55

    0.97

    Dec-08

    -10.76

    -4.49

    -8.22

    0.09

    -10.85

    -4.58

    -8.31

    Average

    -0.59

    -0.60

    -0.55

    Standard Deviation

    4.05

    4.21

    3.81

Conclusion

Standard deviation for the two funds is 4.05 and 4.21.

Summary Introduction

(d)

To Calculate:

In this question we have to calculate Sharpe, Jensen and Treynor ratio for each fund.

Expert Solution
Check Mark

Explanation of Solution

All these ratios are calculated as:

Sharpe ratio=
Excess Return / standard devationESSEN.OF.INVESTMENTS+CONNECT, Chapter 18, Problem 17PS , additional homework tip 1

Treynor=Excess return / BetaESSEN.OF.INVESTMENTS+CONNECT, Chapter 18, Problem 17PS , additional homework tip 2
Jensen=αP = E(rP) − {rf + βP [E(rM) − rf]}

    Total monthly returns

    Excess Returns

    Month

    Vanguard

    Value Fund

    S&P

    T-bills

    Vanguard

    Value Fund

    S&P

    Jan-04

    1.52

    -0.07

    1.35

    0.07

    1.45

    -0.14

    1.28

    Feb-04

    -0.53

    -0.99

    -1.32

    0.06

    -0.59

    -1.05

    -1.38

    Mar-04

    -2.69

    -2.46

    -1.89

    0.09

    -2.78

    -2.55

    -1.98

    Apr-04

    0.22

    2.52

    1.70

    0.08

    0.14

    2.44

    1.62

    May-04

    2.53

    1.39

    1.85

    0.06

    2.47

    1.33

    1.79

    Jun-04

    -1.93

    -7.46

    -3.22

    0.08

    -2.01

    -7.54

    -3.30

    Jul-04

    0.99

    -0.78

    0.25

    0.1

    0.89

    -0.88

    0.15

    Aug-04

    1.52

    2.49

    1.00

    0.11

    1.41

    2.38

    0.89

    Sep-04

    0.21

    1.46

    1.29

    0.11

    0.10

    1.35

    1.18

    Oct-04

    5.22

    4.66

    4.46

    0.11

    5.11

    4.55

    4.35

    Nov-04

    3.24

    3.60

    3.01

    0.15

    3.09

    3.45

    2.86

    Dec-04

    -2.36

    -3.48

    -2.24

    0.16

    -2.52

    -3.64

    -2.40

    Jan-05

    3.62

    0.79

    2.09

    0.16

    3.46

    0.63

    1.93

    Feb-05

    -2.33

    -2.86

    -1.83

    0.16

    -2.49

    -3.02

    -1.99

    Mar-05

    -2.68

    -2.41

    -1.87

    0.21

    -2.89

    -2.62

    -2.08

    Apr-05

    4.08

    7.13

    3.22

    0.21

    3.87

    6.92

    3.01

    May-05

    2.25

    0.51

    0.15

    0.24

    2.01

    0.27

    -0.09

    Jun-05

    3.55

    5.28

    3.82

    0.23

    3.32

    5.05

    3.59

    Jul-05

    -1.85

    -0.85

    -0.93

    0.24

    -2.09

    -1.09

    -1.17

    Aug-05

    0.38

    1.34

    0.80

    0.3

    0.08

    1.04

    0.50

    Sep-05

    -1.88

    0.30

    -2.36

    0.29

    -2.17

    0.01

    -2.65

    Oct-05

    2.87

    5.04

    4.39

    0.27

    2.60

    4.77

    4.12

    Nov-05

    0.93

    0.46

    -0.19

    0.31

    0.62

    0.15

    -0.50

    Dec-05

    3.41

    3.30

    2.41

    0.32

    3.09

    2.98

    2.09

    Jan-06

    0.00

    -1.82

    0.57

    0.35

    -0.35

    -2.17

    0.22

    Feb-06

    0.71

    0.34

    1.65

    0.34

    0.37

    0.00

    1.31

    Mar-06

    0.53

    -0.45

    1.26

    0.37

    0.16

    -0.82

    0.89

    Apr-06

    -3.00

    -5.84

    -3.01

    0.36

    -3.36

    -6.20

    -3.37

    May-06

    -0.27

    -1.55

    0.26

    0.43

    -0.70

    -1.98

    -0.17

    Jun-06

    1.09

    -2.36

    0.45

    0.4

    0.69

    -2.76

    0.05

    Jul-06

    2.70

    3.60

    2.18

    0.4

    2.30

    3.20

    1.78

    Aug-06

    2.63

    2.87

    2.70

    0.42

    2.21

    2.45

    2.28

    Sep-06

    2.56

    1.92

    3.16

    0.41

    2.15

    1.51

    2.75

    Oct-06

    0.75

    1.94

    1.99

    0.41

    0.34

    1.53

    1.58

    Nov-06

    2.32

    0.22

    0.77

    0.42

    1.90

    -0.20

    0.35

    Dec-06

    1.86

    2.18

    1.51

    0.4

    1.46

    1.78

    1.11

    Jan-07

    -2.30

    -1.69

    -1.96

    0.44

    -2.74

    -2.13

    -2.40

    Feb-07

    0.81

    0.89

    1.16

    0.38

    0.43

    0.51

    0.78

    Mar-07

    3.87

    2.92

    4.42

    0.43

    3.44

    2.49

    3.99

    Apr-07

    3.65

    3.37

    3.39

    0.44

    3.21

    2.93

    2.95

    May-07

    -2.02

    -1.14

    -1.46

    0.41

    -2.43

    -1.55

    -1.87

    Jun-07

    -4.74

    -0.79

    -3.13

    0.4

    -5.14

    -1.19

    -3.53

    Jul-07

    1.12

    1.11

    1.28

    0.4

    0.72

    0.71

    0.88

    Aug-07

    2.54

    4.91

    3.88

    0.42

    2.12

    4.49

    3.46

    Sep-07

    0.39

    2.19

    1.35

    0.32

    0.07

    1.87

    1.03

    Oct-07

    -5.86

    -3.90

    -3.87

    0.32

    -6.18

    -4.22

    -4.19

    Nov-07

    0.25

    0.00

    -1.13

    0.34

    -0.09

    -0.34

    -1.47

    Dec-07

    -5.39

    -10.34

    -6.04

    0.27

    -5.66

    -10.61

    -6.31

    Jan-08

    -2.67

    -2.38

    -2.58

    0.21

    -2.88

    -2.59

    -2.79

    Feb-08

    -0.89

    -0.06

    -0.90

    0.13

    -1.02

    -0.19

    -1.03

    Mar-08

    5.64

    6.32

    4.77

    0.17

    5.47

    6.15

    4.60

    Apr-08

    1.44

    3.00

    1.51

    0.17

    1.27

    2.83

    1.34

    May-08

    -7.18

    -6.25

    -8.35

    0.17

    -7.35

    -6.42

    -8.52

    Jun-08

    -1.80

    -0.40

    -0.90

    0.17

    -1.97

    -0.57

    -1.07

    Jul-08

    1.37

    0.45

    1.55

    0.15

    1.22

    0.30

    1.40

    Aug-08

    -7.50

    -11.63

    -9.42

    0.12

    -7.62

    -11.75

    -9.54

    Sep-08

    -18.16

    -15.45

    -16.52

    0.15

    -18.31

    -15.60

    -16.67

    Oct-08

    -7.16

    -7.93

    -6.96

    0.08

    -7.24

    -8.01

    -7.04

    Nov-08

    2.70

    0.57

    0.99

    0.02

    2.68

    0.55

    0.97

    Dec-08

    -10.76

    -4.49

    -8.22

    0.09

    -10.85

    -4.58

    -8.31

    Average

    -0.59

    -0.60

    -0.55

    Sharpe ratio

    -0.15

    -0.14

    -0.14

    Alpha

    -0.03

    -0.04

    0.00

    Treynor

    -0.57

    -0.58

    -0.55

Conclusion
    Alpha-0.03-0.040.00
    Treynor-0.57-0.58-0.55

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Chapter 18 Solutions

ESSEN.OF.INVESTMENTS+CONNECT

Ch. 18 - Prob. 1PSCh. 18 - Prob. 2PSCh. 18 - Prob. 3PSCh. 18 - 4. Two portfolio managers use different procedures...Ch. 18 - Prob. 5PSCh. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Conventional wisdom says that one should measure a...Ch. 18 - Prob. 9PSCh. 18 - Prob. 10PS
Ch. 18 - Bill Smith is evaluating the performance of four...Ch. 18 - Prob. 12PSCh. 18 - Prob. 13PSCh. 18 - Prob. 14PSCh. 18 - Prob. 15PSCh. 18 - Prob. 16PSCh. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 19PSCh. 18 - Prob. 1CPCh. 18 - Prob. 2CPCh. 18 - Prob. 3CPCh. 18 - Prob. 4CPCh. 18 - Prob. 1WMCh. 18 - Prob. 2WMCh. 18 - Prob. 3WMCh. 18 - Prob. 4WM
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