Explanation:
The Treynor measure evaluates a portfolio's performance relative to its systematic risk. It is calculated by taking the excess return (over the risk-free rate) and dividing it by the portfolio's beta:
Using the provided parameters (Risk-free rate ):
The Global Macro strategy has the highest Treynor measure (8.26%) and therefore performed the best on a systematic risk-adjusted basis.
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Q.80 A 5-year research has been conducted on 25 different hedge funds in the United States. The researchers have categorized the funds into 4 distinct hedge fund strategies:
| Fund strategy | Average annual return | Standard deviation | Beta |
|---|---|---|---|
| Global Macro | 13.5% | 18% | 1.15 |
| Long-Short Equity | 21.3% | 31% | 3.1 |
| Equity arbitrage | 22.6% | 35% | 3.4 |
| Fixed income arbitrage | 8% | 2% | 0.6 |
If the risk-free rate is 4% and the S&P 500 has returned an average of 10.1% over the 5 year period, then which fund strategy has performed the best according to the Treynor measure?
A
Global Macro
B
Long-Short Equity
C
Equity arbitrage
D
Fixed income arbitrage