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Performance evaluation

Discuss about teh Investment and Portfolio Management for Sharpe Ratio.

The report mainly focuses on the various portfolios of US market and evaluates that which portfolios are the best in context with the investment. In the report, top 8 mutual funds of the US market has been evaluated on the basis of the average return, standard deviation, beta of the portfolio, average performance of the portfolio, Sharpe ratio, treynor ratio, Jensen’s alpha, Information ratio etc. On the basis of the study, top 4 stocks of the market has been measured and it is suggested to the US investors to invest into those portfolios for the better return and lower risk from the market.  

US market’s economy position and the financial performance explain that the position of the market has been improved and thus the investors are attracting more towards the investment into the US market. Williams (2010) explains that the mutual funds are the best option for the investors to invest the amount. This would reduce the associated risk with the stock of the company (Loukeris et al, 2009). The top 8 mutual fund of the US market has been evaluated on the basis of the various techniques and it has been found that the average performance of all the portfolios are quite significant, the evaluation on each of the stock of the company is as follows:

Average return of all the stocks has been calculated firstly and it has been found that the performance of all the mutual funds is positive and explains that the portfolios are performing well. However, it has been recognized that the stock of Fidelity Advisor® Small Cap Growth, ClearBridge Large Cap Growth, ClearBridge Large Cap Growth, ClearBridge mid Cap Growth and American Beacon Bridgeway Lg Cp Val respectively. The average return of all the above discussed mutual fund is 1.392%, 1.361%, 1.341% and 1.18%.

Henriksson and Merton Model

American Beacon Bridgeway Lg Cp Val

Ariel Appreciation Institutional

Fidelity Advisor® Small Cap Growth

Carillon Eagle Mid Cap Growth

ClearBridge Large Cap Growth

Oppenheimer Rising Dividends

Vanguard Total Stock Market Idx

Vanguard Small Cap Growth Index

Average Return

1.178%

1.124%

1.392%

1.341%

1.361%

0.876%

1.134%

1.093%

(Elton et al, 2009)

Sharpe ratio measures the average return of a portfolio which is earned in extras of risk free rate or total risk of a portfolio. Sharpe return of all the stocks has been calculated further to measure the performance and their excess return to the investors. On the basis of the calculations, it has been found that the performance of all the mutual funds is positive and explains that the portfolios are performing well. However, it has been recognized that the stock of Fidelity ClearBridge Large Cap Growth, ClearBridge mid Cap Growth, Vanguard Total Stock Market Idx and American Beacon Bridgeway Lg Cp Val respectively (Chen & Huang, 2009). The Sharpe ratio of all the above discussed mutual fund is 0.45, 0.39, 0.38 and 0.39.

Sharpe Ratio for Portfolios

Stocks portfolio

Standard deviation

Portfolio return

Risk free rate

Sharpe Ratio

American Beacon Bridgeway Lg Cp Val

2.90%

1.18%

0.02%

      0.3988

Ariel Appreciation Institutional

3.85%

1.12%

0.02%

      0.2865

Fidelity Advisor® Small Cap Growth

3.63%

1.39%

0.02%

      0.3779

Carillon Eagle Mid Cap Growth

3.41%

1.34%

0.02%

      0.3867

ClearBridge Large Cap Growth

2.97%

1.36%

0.02%

      0.4509

Oppenheimer Rising Dividends

2.78%

0.88%

0.02%

      0.3076

Vanguard Total Stock Market Idx

2.84%

1.13%

0.02%

      0.3914

Vanguard Small Cap Growth Index

3.51%

1.09%

0.02%

      0.3058

Average raw returns

Treynor ratio measures the average return of a portfolio which is earned in extras of market index return and the cost of equity of the company. Treynor ratio of all the stocks has been calculated further to measure the performance and their excess return to the investors. On the basis of the calculations, it has been found that the performance of all the mutual funds is positive and explains that the portfolios are performing well (Brown, 2012). However, it has been recognized that the stock of Fidelity Advisor® Small Cap Growth, ClearBridge large Cap Growth, American Beacon Bridgeway Lg Cp Val and Carillon Eagle Mid Cap Growth respectively. The treynor ratio of all the above discussed mutual fund is 1.61%, 1.40%, 1.38% and 1.24% respectively.

Treynor Ratio for Portfolios

Stocks portfolio

Beta

Portfolio return

Risk free rate

Treynor Ratio

American Beacon Bridgeway Lg Cp Val

          0.84

1.18%

0.02%

1.38%

Ariel Appreciation Institutional

          1.19

1.12%

0.02%

0.92%

Fidelity Advisor® Small Cap Growth

          0.85

1.39%

0.02%

1.61%

Carillon Eagle Mid Cap Growth

          1.07

1.34%

0.02%

1.24%

ClearBridge Large Cap Growth

          0.96

1.36%

0.02%

1.40%

Oppenheimer Rising Dividends

          0.97

0.88%

0.02%

0.88%

Vanguard Total Stock Market Idx

1.00

1.13%

0.02%

1.12%

Vanguard Small Cap Growth Index

1.00

1.09%

0.02%

1.07%

Information ratio measures the profitability of a portfolio which is earned in extras of market index return and the volatility of the company. Information ratio calculations over the top 8 mutual funds of US explains that the information ratio of American Beacon Bridgeway Lg Cp Val, Fidelity Advisor® Small Cap Growth, ClearBridge mad Cap Growth and Carillon Eagle large Cap Growth respectively. The information ratio explains that these stocks would offer higher return (Taneja & Bansal, 2011).  

Information Ratio

American Beacon Bridgeway Lg Cp Val

Ariel Appreciation Institutional

Fidelity Advisor® Small Cap Growth

Carillon Eagle Mid Cap Growth

ClearBridge Large Cap Growth

Oppenheimer Rising Dividends

Vanguard Total Stock Market Idx

Vanguard Small Cap Growth Index

Portfolio return

1.18%

1.12%

1.39%

1.34%

1.36%

0.88%

1.13%

1.09%

Return on the index

1.02%

1.11%

1.20%

1.19%

1.26%

1.14%

1.13%

1.08%

Standard deviation

2.90%

3.85%

3.63%

3.41%

2.97%

2.78%

2.84%

3.51%

Information ratio

(Portfolio return - return on index) / Standard deviation

5.45%

0.44%

5.21%

4.42%

3.34%

-9.41%

0.09%

0.26%

Jenses’s alpha ratio measures the profitability of a portfolio on the basis of the market return and cost of equity of the company. Jensen’s alpha calculations over the top 8 mutual funds of US explains that the performance of Ariel Appreciation Institutional, Oppenheimer Rising Dividends, Vanguard Small Cap Growth Index and Vanguard Total Stock Market Idx respectively. The Jensen’s alpha ratio explains that these stocks would offer higher return.

Jensen's Alpha

American Beacon Bridgeway Lg Cp Val

Ariel Appreciation Institutional

Fidelity Advisor® Small Cap Growth

Carillon Eagle Mid Cap Growth

ClearBridge Large Cap Growth

Oppenheimer Rising Dividends

Vanguard Total Stock Market Idx

Vanguard Small Cap Growth Index

Beta

0.84

1.19

0.85

1.07

0.96

0.97

1.00

1.00

Risk free rate

0.02%

0.02%

0.02%

0.02%

0.02%

0.02%

0.02%

0.02%

Market return - risk free rate

1.15%

1.15%

1.15%

1.15%

1.15%

1.15%

1.15%

1.15%

CAPM

 [rf + β (rb – rf)]

0.98%

1.39%

1.00%

1.24%

1.12%

1.13%

1.17%

1.17%

Average return

1.18%

1.12%

1.39%

1.34%

1.36%

0.88%

1.13%

1.09%

Alpha

Average return - CAPM

-0.19%

0.26%

-0.39%

-0.10%

-0.24%

0.25%

0.03%

0.08%

Treynor mazuy model has also been performed over the mutual fund of the companies to measure the performance of the mutual funds. On the basis of the study, it has been found that American Beacon Bridgeway Lg Cp Val, Ariel Appreciation Institutional, Fidelity Advisor® Small Cap Growth, Carillon Eagle Mid Cap Gro and ClearBridge Large Cap Growth are the best portfolios of the market.

Treynor-Mazuy Model

American Beacon Bridgeway Lg Cp Val

Ariel Appreciation Institutional

Fidelity Advisor® Small Cap Growth

Carillon Eagle Mid Cap Growth

ClearBridge Large Cap Growth

Oppenheimer Rising Dividends

Vanguard Total Stock Market Idx

Vanguard Small Cap Growth Index

Portfolio return

1.18%

1.12%

1.39%

1.34%

1.36%

0.88%

1.13%

1.09%

Risk free investment

0.02%

0.02%

0.02%

0.02%

0.02%

0.02%

0.02%

0.02%

Treynor-Mazuy Model

1.16%

1.10%

1.37%

1.32%

1.34%

0.85%

1.11%

1.07%

  (Kumar, Ajjan& Niu, 2008)

Lastly, the Henriksson and Merton model has also been performed over the mutual fund of the companies to measure the performance of the mutual funds. On the basis of the study, it has been found that American Beacon Bridgeway Lg Cp Val, Fidelity Advisor® Small Cap Growth, Carillon Eagle Mid Cap Gro and ClearBridge Large Cap Growth are the best portfolios of the market.

Henriksson and Merton Model

American Beacon Bridgeway Lg Cp Val

Ariel Appreciation Institutional

Fidelity Advisor® Small Cap Growth

Carillon Eagle Mid Cap Growth

ClearBridge Large Cap Growth

Oppenheimer Rising Dividends

Vanguard Total Stock Market Idx

Vanguard Small Cap Growth Index

Portfolio return

1.18%

1.12%

1.39%

1.34%

1.36%

0.88%

1.13%

1.09%

Market return

1.02%

1.11%

1.20%

1.19%

1.26%

1.14%

1.13%

1.08%

Risk free rate

0.02%

0.02%

0.02%

0.02%

0.02%

0.02%

0.02%

0.02%

Beta

0.84

1.19

0.85

1.07

0.96

0.97

1.00

1.00

Henriksson and Merton Model

0.32%

-0.19%

0.36%

0.07%

0.15%

-0.22%

0.00%

0.01%

On the basis of the overall evaluation on all the 8 portfolios, it has been found that the American Beacon Bridgeway Lg Cp Val, Fidelity Advisor® Small Cap Growth, Carillon Eagle Mid Cap Gro and ClearBridge Large Cap Growth are the best portfolios of the market. The return from these mutual funds is higher than the return from the other portfolios. The calculations have been done on the basis of the various portfolio techniques and it has been found that the total return of these portfolios are quite higher than the risk free rate, market return, cost of equity etc so that the investment must be done in these companies for the better performance of the company.

Conclusion:

To conclude, the investors should invest into the American Beacon Bridgeway Lg Cp Val, Fidelity Advisor® Small Cap Growth, Carillon Eagle Mid Cap Gro and ClearBridge Large Cap Growth for better returns.

References:

Brown, R. (2012). Analysis of investments & management of portfolios.

Chen, L. H., & Huang, L. (2009). Portfolio optimization of equity mutual funds with fuzzy return rates and risks. Expert Systems with Applications, 36(2), 3720-3727.

Dettmer, P., Knackendoffel, A., & Thurston, L. P. (2013). Collaboration, consultation, and teamwork for students with special needs. Pearson.

Elton, E. J., Gruber, M. J., Brown, S. J., & Goetzmann, W. N. (2009). Modern portfolio theory and investment analysis. John Wiley & Sons.

Kumar, R., Ajjan, H., & Niu, Y. (2008). Information technology portfolio management: literature review, framework, and research issues. Information Resources Management Journal (IRMJ), 21(3), 64-87.

Loukeris, N., Donelly, D., Khuman, A., & Peng, Y. (2009). A numerical evaluation of meta-heuristic techniques in portfolio optimisation. Operational Research, 9(1), 81-103.

Taneja, Y. P., & Bansal, S. (2011). Efficient security selection: A study of portfolio evaluation techniques. Zenith International Journal of Business Economics and Management Research, 1(3), 48-60.

Williams, A. (2010). U.S. Patent No. 7,840,460. Washington, DC: U.S. Patent and Trademark Office.

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