Performance Evaluation of Grace's Portfolio

Very Hard Performance Evaluation Performance Appraisal

Grace Lee is a portfolio manager overseeing a multi-asset investment fund with a diversified strategy. Over the past year, the portfolio generated an annual return of 12%, while its benchmark (a blended index of equity, fixed income, and alternative assets) returned 10%. Grace's fund is characterized by a Sharpe ratio of 0.8, while the benchmark's Sharpe ratio is reported at 0.7. Her investment strategy entails a proactive approach that involves tactical asset allocation based on macroeconomic indicators.

In her annual performance appraisal meeting, Grace is tasked with justifying the excess return of her portfolio over the benchmark. The committee is interested in understanding not only the absolute returns but also how well her active management decisions contributed to the portfolio's performance in relation to the risks taken.

Which of the following statements best evaluates Grace's portfolio performance in relation to the benchmark?

Grace’s portfolio outperformed the benchmark solely due to higher risk-taking, as indicated by her higher absolute return.

Grace’s superior Sharpe ratio indicates that her portfolio provided a better risk-adjusted return compared to the benchmark.

The excess return of Grace's portfolio can be attributed to effective tactical asset allocation, which enhanced returns without increasing volatility.

Hint

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