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Product Overview

In May 1998, the director of Research at Zeus Asset Management is reflecting on the current performance evaluation of Zeus's mutual funds (which include an equity fund, a bond fund, a balanced fund, and an international fund) and ways to improve the measurement of performance. Zeus has become increasingly aware that absolute returns, or relative returns (returns relative to a benchmark), will not suffice as a measurement of performance and that a measurement (or a series of measurements) of risk-adjusted performance must be added. Performance evaluation is key to structuring compensation and incentive schemes in general, as well as strategic planning for the company's future. Given Zeus's relatively risk-averse clientele, the "correct" measurement of risk is imperative. Students are asked to compute several measures of risk-adjusted performance. Familiarity with running regression models in Excel is required; alternatively, the case can be used to pursue that objective. The case comes with an Excel spreadsheet containing the relevant data (time series of returns [net of risk-free rate] of three mutual funds and corresponding benchmark indices). The case can be used as a vehicle for discussing several concepts: (1) the alternative measures of performance evaluation for mutual funds and their relative merits (e.g., why absolute or relative returns may not reveal the entire truth about performance; which index to use as a benchmark); (2) the alternative measures of risk-adjusted performance (e.g., Sharpe's ratio, Treynor, Jensen's alpha, Gruber's Four Factor alpha, Graham and Harvey's measure of risk-adjusted performance); and (3) the idiosyncrasies of managing portfolios for individuals with particular needs (e.g., tax, liquidity).