Introduction:

Zeus Asset management is a fund management firm which has a conservative and risk
averse investment philosophy. It believes that a quality-oriented approach can lead to
a favorable financial performance. Compared with its main competitors, it provides
customer-oriented services, invests municipal bond fund and implement a strategy of
teamwork. Zeus chooses to utilize risk-adjusted returns as it believes that investors
wont pay for such return which stems from taking corresponding risks merely. What
investors require is that Zeus provides them with a performance which bears
benchmark. Every risk-adjusted return methods have two sides of the same coin
which make some of them more appropriate for some specific fund comparison.
Zeuss competitiveness:
The first unique characteristic is that Zeus focuses on offering customer-oriented
services which means it pays special attention to satisfy clients needs. Thanks to such
structure, most of the employees make business decision in order to fulfill their own
customers objective which can significantly improve their efficiency of portfolio
management. A competitive advantage can be expected in the market.
In addition, Zeus has a skilled and experienced portfolio management group. Its
investment professionals have over 18 years of investment experiences and have been
through at least three recessions or major downturns of the market. More than 75% of
its investment professionals were CFAs and received MBA from top business schools.
The average age of the fund managers is 44 compared that with Fidelity of 26.
Moreover, Zeus has a large client base including mutual funds, trust funds,
foundations and endowment, insurance companies, corporations and individual
investors. Such large base increases its flexibility of asset allocation. In accordance
with their different financial objective, Different individual or institutional investors
are able to fulfill different preference in security selection.
Finally, Zeus also has a unique approach of purchasing securities. Each portfolio
manager is not responsible for purchasing securities for his own clients. Instead, one
manager is assigned to purchase one specific security and then it is allocated to
different portfolios. As a result, the company can benefit from the potential discount
of large trading volume. Moreover, managers are able to provide clients with
securities with higher quality because they evaluate the companies long-term strategy
plans regularly to position the company and price the security better.

Alternative performance measures

Currently, Zeus uses the absolute and relative measures in perform measurements.
Absolute return is a way of measuring a portfolio performances based on the total
return on investment over a certain period. This method can be simply calculated and
is useful in measuring whether investor is making a profit or loss from their portfolio
performance. But it cannot be utilized to make the comparison of performance
between the portfolios and others. Moreover, it does not include risks related to the
investment. Absolute return may overstate the financial result and mislead the
investors to overlook risks.
On the other hand, the Relative return method is able to provide the comparison of the
performance of a portfolio with a benchmark. It can also be used to measure the
performance of more than one portfolios or companies. But, as an appropriate
benchmark is very crucial in such method, managers take extra risks because they are
not able to find a perfect index for comparison due to the variety of stocks in a fund.
In conclusion, they both do not catch the relative risk of a portfolio, thus do not reveal
the entire truth about performance.
For Zeus, risk-adjusted return is a superior method. By taking risk into account, the
performance of various mutual funds can be more precisely evaluated as the excess
return earned for extra per unit of risk can be measured. As a result, it would help the
company to establish its internal rules regarding the level or risk and return. Investors
employ fund managers because they believe managers can use their professional sills
to generate more profit by taking lower corresponding risks. Therefore, it is the higher
amount of return per risk, not the excess return over benchmark or initial investment
that makes Zeus more attractive.
Specific methods of adjusting the returns for risks include the Sharpe Ratio, Treynor
Ratio, Jensens Alpha, beta, and information ratio
Different risk-adjusted return measures employed:
Sharp ratio
Sharpe ratio is the average return earned in excess of the risk-free rate per unit
of volatility or total risk. The advantage is that can be used to directly compare any
series of returns without considering any other factors. However, it assumes that

returns are normally distributed, which is not true in many cases in reality. Moreover,
it is believed that the non-systematic risks can be eliminated by diversification.
Perfect diversification is not possible in practical.
Treynor ratio:
Treynor ratio refers to the excess return over the risk-free rate to the additional risk
taken; In comparison with sharp ratio, systematic risk is used instead of total risk.
Treynor ratio can be compared with the benchmark performance or other portfolio
with the same benchmark. But like the Sharpe ratio, the Treynor ratio does not
quantify the value added. It is only useful if the portfolios under consideration are
sub-portfolios of a broader, fully diversified portfolio. If this is not the case, portfolios
with identical systematic risk, but different total risk, will be rated the same.
Jensens alpha:
Jensens alpha measures the extra return that the portfolio earns after adjusting for its
beta risk. The beta does not refer to only the market beta, but to all factors that are
important to understanding the allocation of the fund. It is difficult to use in practice
because the alpha is likely to be small, and therefore it is difficult to statistically
prove that the alpha is positive.
Information ratio:
The information ratio divides the alpha of the portfolio by the nonsystematic risk.
It measures a portfolio manager's ability to generate excess returns relative to a
benchmark, but also attempts to identify the consistency of the investor. This ratio
will identify if a manager has beaten the benchmark by a lot in a few months or a little
every month.
Choice of appropriate benchmark
Equity fund:
I choose both S&P500 and Lipper Growth Indices for comparing performance of
equity fund, as shown in Appendix A. Zeus Equity Fund focuses more on the Growth
securities due to the risk aversion. As a result, he sharp ratio is appropriate when
comparing the portfolio performance with S&P500 index because when the portfolio
includes only growth stocks, it can not be well diversified. The ratio of S&P500 index
was higher in the first subperiod than the sharp ratio of portfolio. This was due to the
companys weak cash policy and internal rules. The fund had a much better
performance in the second subperiod. I use treynor ratio when I compare the portfolio

with Lipper Growth Index because it is well-diversified. The portfolio outperformed

the index in such period. Information ratio gives the same result.
Bond fund:
For bond fund, it is not possible for investors to purchase all marketable bonds in
Lehman Brother Aggregate Index because the number is enormous. So the portfolios
can be regarded as not well-diversified ones. I choose Lehmann Aggregate Bond
Index as benchmark index because it has large amount of bonds with various types
which can be the representative of whole market. The Sharpe ratio is the best choice
to make a comparative analysis. The result is shown in Appendix B. Its performance
advanced significantly in the second sub period. Sharp ration was higher and the
information ratio is only 1.0967. Such improvement may be due to the application of
a new computer model which allows them to find extra opportunities. Bondsynthetizing also brought about higher coupon which let them generate higher return
under the same level of risk. In all, performance is similar to that of equity fund.
Positive Jensens alpha and information ratio in the second sub period indicates that
the fund outperformed the market.
Balance fund:
The balance fund is a fund with both equities with higher risks and bonds with lower
risks. So it can be considered to be a very well-diversified portfolio. Beta and treynor
ratio are suitable for balance fund. I choose Lipper Index as benchmark bacause it
tracks the financial performance of balance funds. Similarly, balance fund
performance much better in period two. A positive alpha and higher treynor ratio can
confirm an outperformance in such period. (Appendix C)
International fund:
I use MSCI index, not BARRA growth index because the type of stocks in
international fund is unclear. Basically, the largest advantage of international fund is
its nature of diversification. Nevertheless, according to Appendix D, the beta, Sharpe
ration, Treynor ratio, Jensens alpha and information ratio are all higher than the
market figure which indicates that it outperforms the market as well. In another word,
such outperformance may derive from its more aggressive approach which generates
higher return from the benefit of taking more risk premium. The international fund is
managed by a third party Bohren International Advisor and is not consistent with the
companys philosophy. According to Appendix E, the correlation of performance

between international fund and the other three funds is relatively low. The company
may choose to include some into clients portfolio, but should control risk at an
acceptable level.

Appendix