HKSI Paper 12 (Asset Management) English Free Trial Set Two

In investment concepts, it’s crucial to understand the fundamental difference between stocks and bonds. Stocks represent ownership shares in a company, entitling the holder to a portion of the company’s assets and earnings. On the other hand, bonds represent debt obligations issued by corporations or governments, where the investor lends money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. Therefore, option (a) is correct.

Option (b) is incorrect because stocks do not guarantee a fixed return; they offer potential for capital appreciation but also come with risks. Option (c) is incorrect as bonds are generally considered less risky than stocks due to their fixed income nature. Option (d) is incorrect because it is bonds that typically provide voting rights to investors, not stocks.

For a conservative investor like Ms. Z who prioritizes stable income, long-term government bonds would be the most suitable option. Government bonds are considered low-risk investments as they are backed by the government’s ability to tax and print money. They provide a fixed income through periodic interest payments and return the principal amount at maturity, thus offering stability and predictability in income.

Option (a) is incorrect as high-growth technology stocks are more volatile and may not provide stable income. Option (b) might be suitable for income-oriented investors, but government bonds offer even lower risk. Option (d) is incorrect as cryptocurrencies are highly speculative and volatile, not suitable for conservative investors seeking stable income.

Diversification is a key principle in investment to reduce risk by spreading investments across different assets. Option (b) is correct because holding a mix of stocks from different geographic regions helps mitigate the risk associated with regional economic downturns or geopolitical events impacting specific areas. By diversifying geographically, an investor reduces the impact of localized risks on the overall portfolio.

Option (a) is incorrect as investing all funds in a single industry sector increases concentration risk. Option (c) is incorrect as concentrating investments in high-risk assets does the opposite of diversification and increases overall portfolio risk. Option (d) is incorrect because investing in a single asset class lacks diversification across different types of assets, leaving the portfolio vulnerable to risks specific to that asset class.

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. Option (d) is correct because one of the primary benefits of investing in mutual funds is diversification across multiple securities, which helps reduce individual security risk. By investing in a mutual fund, an investor gains exposure to a diversified portfolio managed by professional fund managers, spreading risk across various assets.

Option (a) is incorrect as mutual funds’ returns are not guaranteed to be higher than individual stocks, as they depend on the fund’s performance. Option (b) is incorrect because mutual funds are managed by professional fund managers, reducing individual investor control over investment decisions. Option (c) is incorrect because mutual funds are generally more liquid than individual stocks, as investors can buy or sell shares at the fund’s net asset value (NAV) at the end of each trading day.

TIPS are government-backed bonds designed to protect investors from inflation. They adjust their principal value periodically based on changes in the Consumer Price Index (CPI), ensuring that the investment keeps pace with inflation. Option (d) is correct because TIPS provide a reliable hedge against inflation, preserving the purchasing power of the investor’s capital.

Option (a) is incorrect as short-term government bonds may not provide adequate protection against inflation. Option (b) is incorrect as cash savings accounts typically offer low returns that may not keep up with inflation. Option (c) is incorrect as while real estate can be a hedge against inflation, REITs may not directly track inflation as TIPS do.

To calculate the risk-adjusted return, we use the Sharpe ratio, which measures the excess return (the return above the risk-free rate) per unit of risk (standard deviation). Investment A has a higher risk-adjusted return because it has a higher expected return relative to its standard deviation compared to Investment B. This indicates that Investment A provides a better return for each unit of risk taken. Therefore, option (a) is correct.

Option (b) is incorrect because even though Investment B has a higher expected return, its risk-adjusted return may be lower due to its higher standard deviation. Option (c) is incorrect because the risk-adjusted return differs between the two investments. Option (d) is incorrect because with the given information, we can compare the risk-adjusted returns of both investments using the Sharpe ratio formula.

As risk tolerance decreases, investors demand higher returns to compensate for the increased risk. Therefore, if Mr. F’s risk tolerance decreases, the required return for the bond to remain attractive would increase. This adjustment reflects the investor’s increased aversion to risk, requiring a higher return to justify the investment. Hence, option (a) is correct.

Options (b) and (c) are incorrect because a decrease in risk tolerance would not lead to a decrease or unchanged required return, respectively. Option (d) is incorrect because the required return is influenced by the investor’s risk tolerance rather than market conditions.

For an investor seeking low-risk, low-return options, Investment Y is more suitable because it has a lower standard deviation (2%) compared to Investment X (5%). Lower standard deviation implies lower volatility and risk, aligning with the investor’s preference for low-risk options. Therefore, option (b) is correct.

Option (a) is incorrect because Investment X has a higher standard deviation, making it riskier than Investment Y. Option (c) is incorrect because Investment Y is more suitable for a low-risk, low-return strategy due to its lower risk characteristics. Option (d) is incorrect because the suitability of the investments is independent of the investor’s risk aversion in this scenario, as Investment Y objectively has lower risk.

According to the empirical rule (also known as the 68-95-99.7 rule), approximately 99.7% of the data falls within three standard deviations of the mean in a normal distribution. Since the mean is 70 inches and the standard deviation is 3 inches, a height between 65 inches and 75 inches is within two standard deviations of the mean on either side. Therefore, approximately 99.7% of adult males in this population would be expected to have a height between 65 inches and 75 inches. Hence, option (c) is correct.

Options (a), (b), and (d) are incorrect because they do not accurately represent the percentage of data within two standard deviations of the mean according to the empirical rule.

To find the percentage of students who scored above 85, we need to determine the proportion of data that lies above one standard deviation from the mean (since 85 is one standard deviation above the mean in a normal distribution). According to the empirical rule, approximately 16% of the data lies above one standard deviation from the mean in a normal distribution. Therefore, approximately 16% of students scored above 85. Hence, option (a) is correct.

Options (c), (b), and (d) are incorrect because they do not accurately represent the percentage of students who scored above 85 according to the normal distribution.

According to Modern Portfolio Theory, diversification is key to maximizing returns while managing risk. By spreading investments across assets with different risk-return profiles, Mr. Lee can achieve his goal of moderate risk while seeking to maximize returns. Option (a) is incorrect because investing solely in high-risk assets may exceed Mr. Lee’s risk tolerance. Option (c) is also incorrect because investing solely in low-risk assets would likely result in lower returns, which doesn’t align with Mr. Lee’s objective. Option (d) is incorrect as avoiding investment altogether would not help Mr. Lee achieve his financial goals.

According to CAPM, systematic risk, also known as beta, measures the sensitivity of an asset’s returns to market movements. The CAPM formula states that the expected return of an asset is equal to the risk-free rate plus the asset’s beta multiplied by the market risk premium. Since beta reflects systematic risk, assets with higher beta are expected to have higher returns to compensate investors for bearing additional risk. Therefore, there is a positive linear relationship between systematic risk (beta) and expected return. Option (b) is incorrect because CAPM suggests a positive relationship, not negative. Option (c) is incorrect as CAPM explicitly establishes a relationship between systematic risk and expected return. Option (d) is incorrect because CAPM assumes a linear relationship between systematic risk and expected return.

The Price-to-Book Ratio (P/B ratio) measures a company’s market value relative to its book value, while Return on Equity (ROE) measures a company’s profitability relative to its equity. A high P/B ratio suggests that the market values the company’s assets highly compared to its book value, which could indicate overvaluation. Meanwhile, a low ROE suggests that the company is generating lower profits relative to its equity, further indicating potential overvaluation. Therefore, a company with a high P/B ratio and low ROE is likely to be overvalued. Option (a) is incorrect because high P/B ratio and low ROE typically indicate overvaluation, not undervaluation. Option (c) is incorrect as the combination of high P/B ratio and low ROE does not necessarily imply stable financial performance. Option (d) is incorrect because both high P/B ratio and low ROE provide valuable information for valuation, indicating potential overvaluation.

The primary purpose of the investment management process is to achieve investment objectives within specified constraints. This involves careful consideration of various factors such as risk tolerance, time horizon, liquidity needs, and regulatory requirements. By aligning investment decisions with these objectives and constraints, investors aim to optimize their portfolio returns while managing risks effectively.

Option a) To maximize returns at all costs, is incorrect because while maximizing returns is an important goal, it must be balanced with managing risks and staying within the constraints set by the investor.

Option b) To minimize risks by investing only in safe assets, is incorrect because minimizing risks does not necessarily mean investing solely in safe assets. Risk management involves diversification, asset allocation, and other strategies to mitigate risks while still pursuing investment objectives.

Option d) To speculate on short-term market movements for quick profits, is incorrect because speculation is not a core component of the investment management process. Rather, it focuses on long-term wealth creation through disciplined investment strategies aligned with specific goals.

When identifying investment objectives and constraints, it is essential to consider factors such as the investor’s risk tolerance. Risk tolerance determines the level of volatility or uncertainty an investor can handle in their investment portfolio. By understanding an investor’s risk tolerance, investment managers can tailor investment strategies that align with their comfort level and long-term goals.

Option a) Current market trends, is incorrect because while market trends may provide useful information, they should not dictate investment decisions. Investment objectives and constraints should be based on the investor’s specific needs and circumstances rather than short-term market movements.

Option b) Investment manager’s personal preferences, is incorrect because investment decisions should be driven by the investor’s objectives and constraints, not the personal preferences of the manager. Professional investment managers are expected to act in the best interests of their clients, considering their unique financial situation and goals.

Option d) Recent news headlines, is incorrect because reacting to news headlines can lead to impulsive decisions that may not align with the investor’s long-term objectives. While staying informed about market developments is important, investment decisions should be based on a thorough analysis of the investor’s objectives and constraints rather than short-term news events.

Effectively matching investment objectives with manager skills requires assessing managers’ investment philosophy and approach. This involves understanding how managers make investment decisions, their risk management strategies, and whether their approach aligns with the investor’s objectives and constraints. By selecting managers whose philosophy and approach complement the investor’s goals, the likelihood of achieving desired outcomes is increased.

Option a) Selecting managers solely based on past performance, is incorrect because past performance alone may not be indicative of future success. While past performance can provide valuable insights into a manager’s track record, it should be considered alongside other factors such as investment philosophy, risk management practices, and alignment with the investor’s objectives.

Option c) Choosing managers with the lowest fees, is incorrect because while fees are an important consideration, they should not be the sole determining factor. High-quality investment management services may justify higher fees if they contribute to achieving the investor’s objectives and generating long-term value. It’s essential to evaluate the overall value proposition offered by managers rather than focusing solely on fees.

Option d) Ignoring the investor’s risk tolerance, is incorrect because risk tolerance is a critical factor in the investment decision-making process. Ignoring the investor’s risk tolerance can lead to mismatches between the investment strategy and the investor’s comfort level, potentially resulting in suboptimal outcomes or increased anxiety during periods of market volatility. Matching manager skills with the investor’s risk profile is essential for building a well-aligned investment portfolio.

When faced with a significant financial windfall, such as an inheritance, it’s crucial for Mr. Wong to seek professional guidance to develop an investment strategy tailored to his specific circumstances. Consulting with a financial advisor will help Mr. Wong assess his investment objectives, risk tolerance, time horizon, liquidity needs, and other constraints. This personalized approach ensures that Mr. Wong’s investment decisions align with his long-term financial goals while managing risks effectively.

Option a) Investing all the money in high-risk stocks to maximize potential returns, is incorrect because such a strategy may expose Mr. Wong to excessive risk, especially considering his status as a retiree. Diversification and risk management are key principles to consider when developing an investment strategy.

Option c) Following the latest investment trends found on social media platforms, is incorrect because investment decisions should be based on thorough analysis and consideration of individual circumstances rather than following trends or fads. Social media trends may not necessarily align with Mr. Wong’s financial objectives and constraints.

Option d) Keeping the money in a savings account for safety, is incorrect because while savings accounts offer safety and liquidity, they may not provide sufficient returns to help Mr. Wong achieve his long-term financial goals, especially considering factors such as inflation and low interest rates. Depending solely on a savings account may limit Mr. Wong’s ability to grow his wealth over time.

When identifying investment objectives and constraints, Ms. Chen should prioritize her own financial goals and aspirations. Factors such as retirement planning, saving for a down payment on a house, or funding her children’s education should guide her investment decisions. By defining clear objectives, Ms. Chen can develop a strategic investment plan that aligns with her long-term financial goals and risk tolerance.

Option a) Her friend’s investment recommendations, is incorrect because while seeking advice from friends can be helpful, investment decisions should ultimately reflect Ms. Chen’s individual financial situation, goals, and risk tolerance. Blindly following recommendations without considering personal circumstances may not lead to optimal outcomes.

Option c) Recent market volatility, is incorrect because short-term market fluctuations should not drive long-term investment decisions. Ms. Chen’s investment strategy should be based on her financial objectives and risk tolerance rather than reacting to temporary market movements.

Option b) The latest economic forecasts, is incorrect because while economic forecasts provide valuable information, they should be considered alongside other factors when developing an investment strategy. Ms. Chen’s investment decisions should be driven primarily by her own financial goals and aspirations rather than external economic predictions.

When evaluating potential managers, Mr. Lee should prioritize managers who have demonstrated an ability to preserve capital during market downturns. Consistent returns and downside protection are essential considerations for investors seeking to minimize risk while achieving their investment objectives. Managers who have proven their ability to navigate challenging market conditions and preserve capital for their clients are likely to align well with Mr. Lee’s goals.

Option b) Managers with the highest historical returns, is incorrect because while historical returns provide insights into a manager’s performance, they may not necessarily reflect their ability to preserve capital during adverse market conditions. Past performance should be considered alongside other factors such as risk management practices and alignment with Mr. Lee’s investment objectives.

Option c) Managers who charge the lowest fees, is incorrect because while fees are an important consideration, they should not be the sole determinant when selecting a manager. The focus should be on the overall value proposition offered by the manager, including their investment approach, track record, and alignment with Mr. Lee’s objectives.

Option d) Managers who have received recent accolades and awards, is incorrect because while accolades and awards may indicate excellence in certain areas, they should not be the primary basis for selecting a manager. Mr. Lee should conduct thorough due diligence to ensure that the manager’s investment philosophy and track record align with his specific investment goals and risk tolerance.

Ms. Wang should consult with a financial advisor to analyze her investment objectives and constraints before making any changes to the inherited portfolio. This will help her understand her risk tolerance, time horizon, liquidity needs, and other factors that will inform her investment decisions. By seeking professional guidance, Ms. Wang can develop a strategic plan for the inherited portfolio that aligns with her own financial goals and preferences.

Option a) Sell all existing investments and start fresh with a new portfolio, is incorrect because such a drastic approach may result in unnecessary transaction costs and tax implications. It’s important for Ms. Wang to carefully evaluate her investment options and consider the potential impact of any changes on her overall financial situation.

Option c) Hold onto the inherited portfolio without making any changes, is incorrect because while maintaining the existing investments may be a viable option, it’s essential for Ms. Wang to review the portfolio and ensure it aligns with her own investment objectives and risk tolerance. Holding onto the portfolio without assessment may lead to suboptimal outcomes.

Option d) Invest solely in high-risk assets to maximize potential returns, is incorrect because such a strategy may expose Ms. Wang to excessive risk, especially considering her status as a new investor reassessing an inherited portfolio. Diversification and risk management should be considered when making investment decisions to achieve long-term financial goals.

Strategic asset allocation involves setting target allocations for various asset classes and rebalancing the portfolio periodically to maintain those allocations. It is a long-term approach based on the investor’s risk tolerance, financial goals, and time horizon. Mr. Lee’s decision to invest in various asset classes aligns with strategic asset allocation as he seeks to diversify his portfolio and manage risk over the long term.

Incorrect Answers:

(b) Tactical Asset Allocation: This strategy involves making short-term adjustments to the portfolio based on near-term market forecasts or economic outlook. Mr. Lee’s intention to diversify his portfolio for the long term does not reflect a tactical approach.

(c) Dynamic Asset Allocation: Dynamic asset allocation involves actively shifting investments between asset classes based on changing market conditions or economic indicators. Mr. Lee’s decision seems more focused on long-term diversification rather than active market timing.

(d) Constant-Weighting Asset Allocation: This strategy maintains fixed proportions of asset classes in the portfolio over time. It does not involve periodic rebalancing to align with target allocations, which is a key characteristic of strategic asset allocation.

Rising interest rates often negatively affect equity markets, as borrowing costs increase and economic growth may slow down. Underweighting equity securities in the portfolio can help mitigate the impact of potential market downturns resulting from rising interest rates. By reducing exposure to equities, the investor aims to lower overall portfolio volatility.

Incorrect Answers:

(a) Overweighting Fixed Income Securities: While fixed income securities may provide some protection against rising interest rates, overallocating to this asset class might limit potential returns, especially if interest rates rise faster than expected.

(c) Dynamic Asset Allocation: Dynamic asset allocation involves active adjustments to the portfolio based on changing market conditions. However, in this scenario, the investor’s objective is to mitigate the impact of rising interest rates, rather than actively timing the market.

(d) Tactical Asset Allocation: Tactical asset allocation involves short-term adjustments to the portfolio based on market forecasts. While it may be appropriate in some situations, it does not specifically address the concern of rising interest rates in this scenario.

Income-oriented asset allocation focuses on generating a steady income stream from investments while preserving capital. It typically involves allocating a significant portion of the portfolio to fixed-income securities such as bonds, dividend-paying stocks, and other income-generating assets. This strategy aligns with Mr. Zhang’s objective of preserving capital and generating income for retirement.

Incorrect Answers:

(a) Aggressive Asset Allocation: Aggressive asset allocation aims for maximum capital appreciation and typically involves a higher allocation to equities or other high-risk assets. This strategy may not be suitable for Mr. Zhang, given his risk-averse nature and retirement goals.

(b) Tactical Asset Allocation: Tactical asset allocation involves making short-term adjustments to the portfolio based on market conditions or economic outlook. While it may offer opportunities for capital growth, it may also introduce additional risk, which may not align with Mr. Zhang’s risk profile.

(d) Dynamic Asset Allocation: Dynamic asset allocation involves actively shifting investments between asset classes based on changing market conditions. While it offers flexibility, it may not be necessary for Mr. Zhang’s retirement income needs, which prioritize stability and consistency.

Defensive asset allocation focuses on preserving capital and minimizing downside risk during challenging economic environments. In a period of low inflation and economic stagnation, defensive assets such as high-quality bonds, dividend-paying stocks, and defensive sectors like utilities and consumer staples may perform relatively better. This strategy aims to provide stability and protect the portfolio from potential losses.

Incorrect Answers:

(a) Growth-Oriented Asset Allocation: Growth-oriented asset allocation aims for capital appreciation and typically involves a higher allocation to equities or other high-risk assets. This strategy may not be suitable during periods of economic stagnation when growth prospects are limited.

(c) Dynamic Asset Allocation: Dynamic asset allocation involves actively shifting investments between asset classes based on changing market conditions. While it offers flexibility, it may not be necessary in a prolonged period of low inflation and economic stagnation where market dynamics are relatively stable.

(d) Constant-Weighting Asset Allocation: Constant-weighting asset allocation maintains fixed proportions of asset classes in the portfolio over time. While it may offer simplicity, it may not adequately address the need to adapt to changing economic conditions.

Growth-oriented asset allocation aims to maximize capital appreciation over the long term by allocating a higher proportion of the portfolio to equities or other high-growth assets. This strategy is suitable for investors with a high risk tolerance who seek long-term capital growth rather than immediate income generation. Given Ms. Chen’s risk profile and investment objectives, a growth-oriented approach would be most appropriate.

Incorrect Answers:

(a) Conservative Asset Allocation: Conservative asset allocation focuses on preserving capital and minimizing risk, typically by allocating a larger portion of the portfolio to fixed-income securities and other low-risk assets. This strategy may not align with Ms. Chen’s goal of maximizing capital appreciation.

(b) Tactical Asset Allocation: Tactical asset allocation involves making short-term adjustments to the portfolio based on market conditions or economic outlook. While it may offer opportunities for capital growth, it may introduce additional complexity and risk, which may not be suitable for Ms. Chen’s long-term objectives.

(c) Income-Oriented Asset Allocation: Income-oriented asset allocation prioritizes generating a steady income stream from investments while preserving capital. While it may offer stability and income, it may not maximize capital appreciation, which is Ms. Chen’s primary goal.

The Sharpe Ratio is a widely used measure of risk-adjusted return, which indicates the excess return per unit of risk (volatility) taken by an investment. It helps investors evaluate the return of an investment relative to its risk. A higher Sharpe Ratio indicates better risk-adjusted performance. Therefore, for Mr. Lee to assess the risk-adjusted returns of the mutual fund, the Sharpe Ratio is the most appropriate metric.

Incorrect Options:

b) Price-to-Earnings Ratio – This ratio is commonly used to assess the valuation of stocks, not the risk-adjusted returns of investment funds. It compares a company’s current share price to its earnings per share.

c) Debt-to-Equity Ratio – This ratio measures a company’s financial leverage, indicating the proportion of debt to equity used to finance its operations. It is not directly relevant to evaluating the risk-adjusted returns of investment funds.

d) Current Ratio – This ratio assesses a company’s liquidity and its ability to meet short-term liabilities with short-term assets. It is not suitable for evaluating the risk-adjusted returns of investment funds.

The Sharpe Ratio measures the risk-adjusted return of an investment relative to its volatility. It is calculated by subtracting the risk-free rate of return from the investment’s return and dividing the result by the standard deviation of the investment’s returns. Mr. Chan should primarily consider the Sharpe Ratio because it provides insight into how well the fund has performed relative to the amount of risk taken. A higher Sharpe Ratio indicates better risk-adjusted performance.

Incorrect Options and Explanation:

(a) Standard Deviation – Standard deviation measures the volatility of returns but does not take into account the return relative to risk, making it less suitable for performance evaluation.

(c) Price-to-Earnings Ratio – Price-to-Earnings Ratio (P/E Ratio) is a valuation metric used to assess a company’s stock price relative to its earnings per share. It is not directly relevant to evaluating the performance of a mutual fund.

(d) Moving Average Convergence Divergence (MACD) – MACD is a technical analysis tool used to identify changes in momentum and potential trends in an asset’s price. It is not used for performance evaluation in the context of mutual funds.

The Information Ratio measures the consistency of a portfolio manager’s ability to generate excess returns relative to a benchmark, considering the level of risk taken. It is calculated by dividing the excess return of the portfolio over the benchmark by the tracking error, which represents the volatility of the active returns. A higher Information Ratio indicates better risk-adjusted performance.

Incorrect Options and Explanation:

(b) The ratio of alpha to beta – Alpha measures the excess return of a portfolio relative to its beta, while beta measures the sensitivity of the portfolio’s returns to market movements. However, the Information Ratio is specifically concerned with excess return relative to tracking error.

(c) The ratio of active return to systematic risk – This statement is inaccurate as the Information Ratio compares excess return to tracking error, not systematic risk.

(a) The ratio of upside potential to downside risk – While this ratio is relevant for evaluating risk, it does not specifically measure the consistency of excess returns relative to a benchmark, which is the focus of the Information Ratio.

The Treynor Ratio measures the excess return of a portfolio relative to its systematic risk, as represented by beta. It is calculated by dividing the excess return of the portfolio over the risk-free rate by the portfolio’s beta. Mr. X should primarily consider the Treynor Ratio as it assesses how well the investment enhances the portfolio’s risk-adjusted return, taking into account systematic risk.

Incorrect Options and Explanation:

(a) Sortino Ratio – The Sortino Ratio measures the risk-adjusted return of an investment, specifically focusing on downside risk or volatility. However, it does not consider systematic risk, making it less suitable for assessing the impact on a portfolio’s overall risk and return profile.

(c) Tracking Error – Tracking error measures the volatility of the active returns of a portfolio relative to its benchmark. While it is important for evaluating active management, it does not directly assess the impact on the portfolio’s risk-adjusted performance.

(d) Jensen’s Alpha – Jensen’s Alpha measures the excess return of a portfolio relative to its expected return based on the capital asset pricing model (CAPM). While it indicates the portfolio manager’s ability to generate excess returns, it does not specifically consider the portfolio’s systematic risk, unlike the Treynor Ratio.

The Brinson Model is a performance attribution technique that decomposes the returns of a portfolio into various factors, such as asset allocation, security selection, and market timing. It allows analysts to assess the contribution of each factor to the portfolio’s overall performance relative to a benchmark. Mr. Z should use the Brinson Model to evaluate the hedge fund manager’s ability to outperform the benchmark while considering different sources of return and risk.

Incorrect Options and Explanation:

(b) Sharpe Ratio – The Sharpe Ratio measures the risk-adjusted return of an investment relative to its volatility. While it is useful for assessing risk-adjusted performance, it does not provide insights into the specific factors driving the performance, unlike the Brinson Model.

(c) Jensen’s Alpha – Jensen’s Alpha measures the excess return of a portfolio relative to its expected return based on the capital asset pricing model (CAPM). While it indicates the manager’s ability to generate excess returns, it does not analyze the contribution of different factors to the portfolio’s performance.

(d) Treynor Ratio – The Treynor Ratio measures the excess return of a portfolio relative to its systematic risk, as represented by beta. While it assesses risk-adjusted performance, it does not provide a detailed breakdown of the sources of return, which is necessary for Mr. Z’s analysis.