MIDTERM IN-CLASS TEST IRM SEM 2

MIDTERM IN-CLASS TEST

SEMESTER TWO

20 February 2017


MODULE CODE: IRM

MODULE TITLE: INVESTMENTS AND RISK MANAGEMENT

DATE: 20 FEBRUARY 2016

TIME: 2pm – 4pm


TIME ALLOWED: 1 hour and 45 minutes




IRM 2016-2017 Page 1 of 6

, Question 1 (25 marks)

Calculate annualised Sharpe and Sortino ratios for an asset given the set of its daily return
figures. Assume annual risk-free rate of 2%. Show your workings and explain what the
results mean in the context of asset returns and performance expectations (20 marks total for
showing the correct Sharpe and Sortino results and the workings including the formulas for
both. Additional 5 marks for explaining the results).

Days Daily
return
1 1.8%
2 -3.6%
3 1.2%
4 2.0%
5 -1.6%
6 1.4%


Marking scheme:
5 marks for writing the formula and description of Sharpe ratio
5 marks for correctly calculating the Sharpe ratio with workings
5 marks for writing the formula and description of Sortino ratio
5 marks for correctly calculating the Sortino ratio with workings
5 marks for clear interpretation of the results in the context of asset returns and performance
expectations

Indicative answers:

Risk free rate 2%

Days Daily return

1 1.8% -3.6%
2 -3.6% -1.6%
3 1.2% 1.2%
4 2.0% 1.4%
5 -1.6% 1.8%
6 1.4% 2.0%

Average daily return 0.20% Sortino volatility daily 1.41%
Average annualised return 50.4% Sortino volatility annual 22.4%

Daily volatility 2.28%
Annualised volatility 36.1%
Sharpe ratio (annualised) 1.34
Sortino ratio (annualised) 2.16
10 marks for the correct workings of Sharpe and Sortino ratios


The Sharpe Ratio is a measure for calculating risk-adjusted return. It reflects the average
return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the


IRM 2016-2017 Page 2 of 6