Reading 54 Analysis of Active Portfolio Management [Sharpe Ratio Calculation]

[San15]

Practice Problem #6 Page 461
S&P 500 Indigo Fund
E(annual return) 9% 10.5%
Return Std Dev 18% 25%
Sharpe Ratio 0.333 0.30
Active Return 1.2%
Active Risk 8%
Information Ratio 0.15
I understand that the optimal amount of active risk is caluculated as IR/SR(b) * STD(Rb).
Optimal active risk is 0.15/0.333(18%)= 8.11%
Weight on active portfolio would be 8.11%/8.0% = 1.014 and
Weight on benchmark would be 1- 1.014 = -0.014
To further prove that this is correct the author goes to prove the optimal sharpe ratio is 0.365
How are they calculating total excess return as 6.0% + (1.014* 1.2)= 7.217% where is 6% coming from?

 

[Backwardation]

S&P Sharpe Ratio = 0,33333
Sharpe Ratio (Portfolio Return - RFR)/StD –> (9-x)/18=0,33 solve for x –> 6%

 

[San15]

Thank you.

 

[San15]

That is question is not from Level1. But thank you for the reply

 

[Backwardation]

San15 wrote:
That is question is not from Level1. But thank you for the reply

Really? there is more on Sharpe Ratio in other levels?

 

[melissabt]

Solving that equation gives me x–> 3%

 

[S2000magician]

Backwardation wrote:

San15 wrote:That is question is not from Level1. But thank you for the reply

Really? there is more on Sharpe Ratio in other levels?

Besides Level I it appears only at Level II and Level III.

 

[cpk123]

are they using rm - rf = Market Risk premium … bcos as melissabt has pointed out
solving (9-x)/18 = 0.333 gives x = 3%