FUND MANAGEMENT SIMULATION PROJECT

To measure the tracking error of the passive fund with the selected index as benchmark.

Your passive fund has an objective to track a selected index. At the setting up of the fund, you have chosen a stock market index to act as the benchmark (for example NZX50) of your passive fund. Tracking error is a measurement of how much the return on a portfolio deviates from the return on its benchmark index. Tracking error is a measure of how closely a portfolio follows the index to which it is benchmarked. Tracking error represents a divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. This is often in the context of a hedge or mutual fund that did not work as effectively as intended, creating an unexpected profit or loss instead.

The second method to calculate the tracking error is more complicated, but more informative. This calculation involves taking the standard deviation of the difference in the fund's and index's returns over time.

To evaluate the performance of the active fund using the four known techniques as below:

1. Sharpe Ratio

2. Treynor Ratio

3. Jensen's Alpha

4. Risk Adjusted Performance (RAP)

• Adjust the risk of the portfolio to equalize the risk of the market or benchmark portfolio;

• Compare the returns after risk adjustment to the benchmark portfolio returns; and

• Resulting values larger than the market return (or other benchmark used) would indicate superior performance.

Lastly, your report should also include the followings:

1. NAV/unit of each of the funds (passive and active) on October 02, 2015;

2. Realized gains (if any) of each of the funds (passive and active) on October 02, 2015.

Attachment:- FUND MANAGEMENT SIMULATION PROJECT.docx