This report is aim to analyse the benefits of risk-adjusted performance measurements to Zeus Asset Management. Zeus Asset Management is a fund management firm founded in 1968 in Atlanta by Tir Jerry Schneider. It serves both institutional and individual investors and with more than $1.7 million assets under management. The director of research, John Abbot, is considering adopting risk-adjusted approach in performance assessment.
Zeus’s competitiveness analysis
Zeus’s main competitors are the mutual funds in particular market. Compared with those competitors, Zeus has strong competitive advantages.
Firstly, different from many managed funds of actively trading, Zeus’s investment philosophy is based on the belief that …show more content…
That comes the Treynor Ratio which calculated using the formula: , where β is the beta of a portfolio under CAPM. Therefore, the Treynor Ratio measures only the systematic risks of the portfolio so that it is useful only when comparing well diversified portfolios.
Another method to adjust return for risks is Jensen’s Alpha. It is the difference between the real return and the expected return predicted by the CAPM. With Jensen’s Alpha, we can see that whether the portfolio can generate excess return. Additionally, information ratio divides the alpha of the portfolio by the non-systematic risk. Similarly, under the CAPM, we can derive the beta of the portfolio to see whether the portfolio is aggressive or not compared to the market. The three methods above all based on the CAPM so when we are doing the modelling work, we must ensure that the inputs of CAPM is accurate and the assumptions are reasonable.
Choosing the appropriate benchmark
In terms of the bond portfolio, the Lehman Brother Aggregate Bond Index can be used as a benchmark. The index includes a variety of bonds such as government securities, mortgage securities, asset-backed securities and corporate securities to simulate the universe of bonds in the market.
For the equity fund, S&P 500 Index, Lipper Growth Index and BARRA Growth Index can be chosen as the benchmarks. We choose Lipper Growth Index and BARRA Growth Index because Zeus’s equity fund mainly include medium to