CHAPTER 25

EVALUATION OF PORTFOLIO PERFORMANCE

Answers to Questions

1. The two major factors would be: (1) attempt to derive risk-adjusted returns that exceed a
naive buy-and-hold policy and (2) completely diversify - i.e., eliminate all unsystematic
risk from the portfolio. A portfolio manager can do one or both of two things to derive
superior risk-adjusted returns. The first is to have superior timing regarding market
cycles and adjust your portfolio accordingly. Alternatively, one can consistently select
undervalued stocks. As long as you do not make major mistakes with the rest of the
portfolio, these actions should result in superior risk-adjusted returns.

2. a) Treynor ratio and Jensen’s alpha measure risk by systematic risk, beta. The Sharp
ratio measure uses total risk, the standard deviation of returns over time. The information
ratio uses the standard deviation of excess returns where excess return is the difference
between the return on a portfolio and its benchmark. The Sortino ratio uses a semi-
deviation measure, including only those returns that fall below a specified minimum
acceptable return.
b) Treynor (1965) divided a fund’s excess return (return less risk-free rate) by its beta.
For a fund not completely diversified, Treynor’s “T” value will understate risk and
overstate performance. Sharpe (1966) divided a fund’s excess return by its standard
deviation. Sharpe’s “S” value will produce evaluations very similar to Treynor’s for
funds that are well diversified. Jensen (1968) measures performance as the difference
between a fund’s actual and required returns. Since the latter return is based on the
CAPM and a fund’s beta, Jensen makes the same implicit assumptions as Treynor -
namely, that funds are completely diversified. The information ratio (IR) measures a
portfolio’s average return in excess of that of a benchmark, divided by the standard
deviation of this excess return. Like Sharpe, it can be used when the fund is not
necessarily well-diversified. The Sortino Ratio defines excess return as the difference
between the portfolio return and a minimum acceptable return defined by the investor;
this is divided by a semi-deviation measure that is computed using only returns less than
the minimum acceptable return.

3. For portfolios with R2 values noticeably less than 1.0, it would make sense to compute
both measures. Differences in the rankings generated by the two measures would suggest
less-than-complete diversification by some funds - specifically, those that were ranked
higher by Treynor than by Sharpe.

4. Jensen’s alpha () is found from the equation Rjt – RFRt == j + j[Rmt – RFRt] +ejt. The
aj indicates whether a manager has superior (j > 0) or inferior (j < 0) ability in market
timing or stock selection, or both. As suggested above, Jensen defines superior (inferior)
performance as a positive (negative) difference between a manager’s actual return and his

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 CAPM-based required return. For poorly diversified funds, Jensen’s rankings would
more closely resemble Treynor’s. For well-diversified funds, Jensen’s rankings would
follow those of both Treynor and Sharpe. By replacing the CAPM with the APT,
differences between funds’ actual and required returns (or “alphas”) could provide fresh
evaluations of funds.

5. The Information Ratio (IR) is calculated by dividing the average return on the portfolio
less a benchmark return by the standard deviation of the excess return. The IR can be
viewed as a benefit-cost ratio in that the standard deviation of return can be viewed as a
cost associated in the sense that it measures the unsystematic risk taken on by active
management. Thus IR is a cost-benefit ratio that assesses the quality of the investor’s
information deflated by unsystematic risk generated by the investment process.

6. Returns-based measures compare the actual returns on a portfolio to a benchmark. Sharpe

and Treynor are simple measures, comparing portfolio returns to a risk-free rate. The
information ratio and Sortino can use the returns of the benchmark portfolio as the
standard of comparison. Another type of returns-based analysis is returns-based style
analysis where portfolio returns are regressed over time against various style benchmarks
to determine the portfolio’s underlying risk exposures and how it performed against the
regression-determined benchmark. Returns-based measures are easier to compute as they
use available historical returns. That is their biggest disadvantage, as well: the use of
historical data means any changes in portfolio performance or composition will be
detected with a lag.
Holding-based based review performance by examining the concurrent portfolio
holdings. By reviewing the securities in the portfolio it can be determined if the
portfolio’s style is changing as well as precisely why it over- or under-performed a
benchmark.

7. The difference by which a manager’s overall actual return beats his/her overall
benchmark return is termed the total value-added return and decomposes into an
allocation effect and a selection effect. The former effect measures differences in weights
assigned by the actual and benchmark portfolios to stocks, bonds and cash times the
respective differences between market-specific benchmark returns and the overall
benchmark return. The latter effect focuses on the market-specific actual returns less the
corresponding market-specific benchmark returns times the weights assigned to each
market by the actual portfolio. Of course, the foregoing analysis implicitly assumes that
the actual and benchmark market-specific portfolios (e.g., stocks) are risk-equivalent. If
this is not true the analysis would not be valid.

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8.
8(a).
Benchmark Explain two different weaknesses of using each of the
benchmarks to measure the performance of the portfolio.

Market  A market index may exhibit survivorship bias; firms that have
Index gone out of business are removed from the index resulting in a
performance measure that overstates the actual performance had
the failed firms been included.
 A market index may exhibit double counting that arises because
of companies owning other companies and both being represented
in the index.
 It is often difficult to exactly and continually replicate the
holdings in the market index without incurring substantial trading
costs.
 The chosen index may not be an appropriate proxy for the
management style of the managers.
 The chosen index may not represent the entire universe of
securities (e.g., S&P 500 Index represents 65-70 percent of U.S.
equity market capitalization).
 The chosen index may have a large capitalization bias (e.g., S&P
500 has a large capitalization bias).
 The chosen index may not be investable. There may be securities
in the index that cannot be held in the portfolio.
Benchmark  This is the most difficult performance measurement method to
Normal develop and calculate.
Portfolio  The normal portfolio must be continually updated, requiring
substantial resources.
 Consultants and clients are concerned that managers who are
involved in developing and calculating their benchmark portfolio
may produce an easily-beaten normal portfolio making their
performance appear better than it actually is.
Median of  It can be difficult to identify a universe of managers appropriate
the Manager for the investment style of the plan’s managers.
Universe  Selection of a manager universe for comparison involves some,
perhaps much, subjective judgment.
 Comparison with a manager universe does not take into account
the risk taken in the portfolio.
 The median of a manager universe does not represent an
“investable” portfolio, meaning a portfolio manager may not be
able to invest in the median manager portfolio.

(Continued)

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  Such a benchmark may be ambiguous. The names and weights of
the securities constituting the benchmark are not clearly
delineated.
 The benchmark is not constructed prior to the start of an
evaluation period; it is not specified in advance.
 A manager universe may exhibit survivorship bias; managers that
have gone out of business are removed from the universe resulting
in a performance measure that overstates the actual performance
had those managers been included.

8b)i.
The Sharpe ratio is calculated by dividing the portfolio risk premium, (i.e., actual
portfolio return minus risk-free return), by the portfolio standard deviation of return.

Sharpe Ratio = (Rp – Rf)/p

Where: Rp = Actual portfolio return

Rf = Risk-free return
p = Standard deviation of portfolio return

The Treynor measure is calculated by dividing the portfolio risk premium (i.e., actual
portfolio return minus risk-free return), by the portfolio beta.

Treynor measure = (Rp – Rf)/p

Where: p = Portfolio beta

Jensen’s alpha is calculated by subtracting the market premium, adjusted for risk by the
portfolio’s beta, from the actual portfolio’s excess return (risk premium). It can be
described as the difference in return earned by the portfolio compared to the return
implied by the Capital Asset Pricing Model or Security Market Line.

p = Rp – Rf – p(Rm- Rf)
or p = Rp – [Rf +p(Rm – Rf)]

8(b).ii.
The Sharpe ratio assumes that the relevant risk is total risk and measures excess return
per unit of total risk.

The Treynor measure assumes that the relevant risk is systematic risk and measures
excess return per unit of systematic risk.

Jensen’s alpha assumes that the relevant risk is systematic risk and measures excess
return at a given level of systematic risk.

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9.
9(a). The basic procedure in portfolio evaluation is to compare the return on a managed
portfolio to the return expected on an unmanaged portfolio having the same risk, via use
of the CAPM. That is, expected return (Rp) is calculated from:

Rp = Rf + p(Rm - Rf)

Where Rf is the risk-free rate, Rm is the unmanaged portfolio or the market return and p is
the beta coefficient or systematic risk of the managed portfolio. The benchmark of
performance then is the unmanaged portfolio. The typical proxy for this unmanaged
portfolio is some aggregate stock market index such as the S&P 500.

9(b). The benchmark error often occurs because the unmanaged portfolio used in the evaluation
process is not “optimized.” That is, market indices, such as the S&P 500, chosen as
benchmarks are not on the evaluator’s ex ante mean/variance efficient frontier.
Benchmark error may also occur because of an error in the estimation of the risk free
return. Together, these two sources of error will cause the implied Security Market Line
(SML) to be mispositioned.

9(c). The main ingredients are that the true risk-free rate is lower than the measured risk-free
rate and the true market is above the measured market. The result is under-performance
relative to the true SML rather than superior performance relative to the measured SML.

9(d). The response depends upon one’s beliefs about whether these portfolios represent the true
market portfolio. The DJIA is comprised of only 30 industrial stocks; S&P 500 includes
more firms and broader economic sector exposure but has a large-cap bias. The NYSE
Composite includes only NYSE-traded stocks. All three measures exclude asset classes
such as bonds, cash, real estate, and non-US equities.

9(e). Defense of CAPM: it is valid as a normative theory as it describes the proper measure of
risk (systematic risk, not total risk or another risk definition) and it shows what the
relationship should be between risk and expected return; it is linear and affected by the
market risk premium and the asset’s level of systematic risk.
Scrap CAPM: Opponents may argue that a theory isn’t worth much if variables can’t be
adequately measured. We cannot do empirical testing to prove or disprove it because a)
benchmark error may or may not exist and b) if they do exist we cannot adequately
measure benchmark returns.

10. When measuring the performance of an equity portfolio manager, overall returns can be
related to a common total risk or systematic risk. Factors influencing the returns achieved
by the bond portfolio manager are more complex. In order to evaluate performance based
on a common risk measure (i.e., market index), four components must be considered that
differentiate the individual portfolio from the market index. These components include:
(1) a policy effect, (2) a rate anticipation effect, (3) an analysis effect, and (4) a trading
effect. Decision variables involved include the impact of duration decisions, anticipation
of sector/quality factors, and the impact of individual bond selection.
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 CHAPTER 25

Answers to Problems

1(a).

1(b).

Sharpe Treynor

P 2 3
Q 4 2
R 5 5
S 1 1
Market 3 4
1(c). It is apparent from the rankings above that Portfolio Q was poorly diversified since
Treynor ranked it #2 and Sharpe ranked it #4. Otherwise, the rankings are similar.

2.
2(a). The Treynor measure (T) relates the rate of return earned above the risk-free rate to the
portfolio beta during the period under consideration. Therefore, the Treynor measure
shows the risk premium (excess return) earned per unit of systematic risk:
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 Ri - R f
Ti =
i

where: Ri = average rate of return for portfolio i during the specified period
Rf = average rate of return- on a risk-free investment during the specified period
i = beta of portfolio i during the specified period.

Treynor Measure Performance Relative to the Market (S&P 500)

10% - 6%
T= = 6.7% Outperformed
0.60

Market (S&P 500)

12% - 6%
TM = = 6.0%
1.00
The Treynor measure examines portfolio performance in relation to the security market
line (SML). Because the portfolio would plot above the SML, it outperformed the S&P
500 Index. Because T was greater than TM, 6.7 percent versus 6.0 percent, respectively,
the portfolio clearly outperformed the market index.

The Sharpe measure (S) relates the rate of return earned above the risk free rate to the
total risk of a portfolio by including the standard deviation of returns. Therefore, the
Sharpe measure indicates the risk premium (excess return) per unit of total risk:
Ri - Rf
S=
i
where: Ri = average rate of return for portfolio i during the specified period
Rf = average rate of return on a risk-free investment during the specified period
i = standard deviation of the rate of return for portfolio i during the specified
period.

Sharpe Measure Performance Relative to the Market (S&P 500)

10% - 6%
S= = 0.222% Underperformed
18%

Market (S&P 500)

12% - 6%
SM= = 0.462%
13%
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 The Sharpe measure uses total risk to compare portfolios with the capital market line
(CML). The portfolio would plot below the CML, indicating that it underperformed the
market. Because S was less than SM, 0.222 versus 0.462, respectively, the portfolio
underperformed the market.

2(b). The Treynor measure assumes that the appropriate risk measure for a portfolio is its
systematic risk, or beta. Hence, the Treynor measure implicitly assumes that the portfolio
being measured is fully diversified. The Sharpe measure is similar to the Treynor
measure except that the excess return on a portfolio is divided by the standard deviation
of the portfolio.

For perfectly diversified portfolios (that is, those without any unsystematic or specific
risk), the Treynor and Sharpe measures would give consistent results relative to the
market index because the total variance of the portfolio would be the same as its
systematic variance (beta). A poorly diversified portfolio could show better performance
relative to the market if the Treynor measure is used but lower performance relative to
the market if the Sharpe measure is used. Any difference between the two measures
relative to the markets would come directly from a difference in diversification.

In particular, Portfolio X outperformed the market if measured by the Treynor measure

but did not perform as well as the market using the Sharpe measure. The reason is that
Portfolio X has a large amount of unsystematic risk. Such risk is not a factor in
determining the value of the Treynor measure for the portfolio, because the Treynor
measure considers only systematic risk. The Sharpe measure, however, considers total
risk (that is, both systematic and unsystematic risk). Portfolio X, which has a low amount
of systematic risk, could have a high amount of total risk, because of its lack of
diversification. Hence, Portfolio X would have a high Treynor measure (because of low
systematic risk) and a low Sharpe measure (because of high total risk).

3(a). Portfolio MNO enjoyed the highest degree of diversification since it had the highest R2
(94.8%). The statistical logic behind this conclusion comes from the CAPM which says
that all fully diversified portfolios should be priced along the security market line. R 2 is a
measure of how well assets conform to the security market line, so R 2 is also a measure
of diversification.
3(b). Note the mean returns are net of the risk-free rate. Doing the calculations we obtain:
Fund Treynor Sharpe Jensen
ABC 0.975(4) 0.857(4) 0.192(4)
DEF 0.715(5) 0.619(5) -0.053(5)
GHI 1.574(1) 1.179(1) 0.463(1)
JKL 1.262(2) 0.915(3) 0.355(2)
MNO 1.134(3) 1.000(2) 0.296(3)
3(c).
Fund t(alpha)
ABC 1.7455(3)
DEF -0.2789(5)
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 GHI 2.4368(1)
JKL 1.6136(4)
MNO 2.1143(2)

Only GHI and MNO have significantly positive alphas at a 95% level of confidence.

4(a). (Information ratio) IRj = j/u where u = standard error of the regression

IRA = .058/.533 = 0.1088

IRB = .115/5.884 = 0.0195
IRC = .250/2.165 = 0.1155
4(b). Annualized IR = (T)1/2(IR)
Annualized IRA = (52)1/2(0.1088) = 0.7846
Annualized IRB = (26)1/2(0.0195) = 0.0994
Annualized IRC = (12)1/2(0.1155) = 0.4001
4(c). The higher the ratio, the better. Based upon the answers to part a, Manager C would be
rated the highest followed by Managers A and B, respectively. However, once the values
are annualized, the ranking change. Specifically, based upon the annualized IR, Manger
A is rated the highest, followed by C and B. (In both cases, Manager B is rated last).
Based upon the Grinold-Kahn standard for “good” performance (0.500 or greater), only
Manager A meets that test.

5(a). Overall performance (Fund 1) = 26.40% - 6.20% = 20.20%

Overall performance (Fund 2) = 13.22% - 6.20% = 7.02%

5(b). E(Ri) = 6.20 + (15.71 – 6.20)

= 6.20 +  (9.51)
Total return (Fund 1) = 6.20 + (1.351)(9.51) = 6.20 + 12.85 = 19.05%
where 12.85% is the required return for risk
Total return (Fund 2) = 6.20 + (0.905)(9.51) = 6.20 + 8.61 = 14.81%
where 8.61% is the required return for risk

5(c)(i). Selectivity1 = 20.2% - 12.85% = 7.35%

Selectivity2 = 7.02% - 8.61% = -1.59%

5(c)(ii).Ratio of total risk1 = 1/m = 20.67/13.25 = 1.56

Ratio of total risk2 = 2/m = 14.20/13.25 = 1.07

R1 = 6.20 + 1.56 (9.51) = 6.20 + 14.8356 = 21.04%

R2 = 6.20 + 1.07 (9.51) = 6.20 + 10.1757 = 16.38%
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 Diversification1 = 21.04% – 19.05% = 1.99%
Diversification2 = 16.38% – 14.81% = 1.57%

5(c)(iii). Net Selectivity = Selectivity – Diversification

Net Selectivity1 = 7.35% - 1.99% = 5.36%
Net Selectivity2 = -1.59% - 1.57% = -3.16%

5(d). Even accounting for the added cost of incomplete diversification, Fund 1’s performance
was above the market line (best performance), while Fund 2 fall below the line.

6.
Mgr X
a. Year Return Mgr Y Return
1 -1.5 -6.5
2 -1.5 -3.5
3 -1.5 -1.5
4 -1.0 3.5
5 0.0 4.5
6 4.5 6.5
7 6.5 7.5
8 8.5 8.5
9 13.5 12.5
10 17.5 13.5
Average 4.5 4.5
Std Dev 6.90 6.63
Semi-dev 0.65 4.20
Semi-deviation considers only the returns that are below the average.

b. Sharpe ratio: (average return minus risk-free rate) / standard deviation

Mgr X: 0.435
Mgr Y: 0.452 Best performer

Sortino ratio: (average return minus minimum acceptable return)/semi-

c. deviation
Mgr X: 4.602 Best performer
Mgr Y: 0.714

d. The Sharpe and Sortino measures should provide the same performance ranking when
the return distributions are symmetrical for the funds or managers under consideration.
Asymmetric distributions, such as when one manager is hedging risk exposure or
using a portfolio insurance strategy, the performance rankings should differ.

7.
7(a)(i). .6(-5) + .3(-3.5) + .1(0.3) = -4.02%
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7(a)(ii). .5(-4) + .2(-2.5) + .3(0.3) = -2.41%

7(a)(iii). .3(-5) + .4(-3.5) + .3(0.3) = -2.81%

Manager A outperformed the benchmark fund by 161 basis points while Manager B beat
the benchmark fund by 121 basis points.

7(b)(i). [.5(-4 + 5) + .2(-2.5 + 3.5) + .3(.3 -.3)] = 0.70%

7(b)(ii). [(.3 - .6) (-5 + 4.02) + (.4 - .3) (-3.5 + 4.02) + (.3 -.1)(.3 + 4.02)] = 1.21%

Manager A added value through her selection skills (70 of 161 basis points) and her
allocation skills (71 of 161 basis points). Manager B added value totally through his
allocation skills (121 of 121 basis points).

8.
8(a). Overall, both managers added value by mitigating the currency effects present in the
Index. Both exhibited an ability to “pick stocks” in the markets they chose to be in
(Manager B in particular). Manager B used his opportunities not to be in stocks quite
effectively (via the cash/bond contribution to return), but neither of them matched the
passive index in picking the country markets in which to be invested (Manager B in
particular).

Manager A Manager B
Strengths Currency Management Currency Management
Stock Selection Stock Selection
Use of Cash/Bond Flexibility

Weaknesses Country Selection Country Selection

(to a limited degree)

8(b). The column reveals the effect on performance in local currency terms after adjustment
for movements in the U.S. dollar and, therefore, the effect on the portfolio. Currency
gains/losses arise from translating changes in currency exchange rates versus the U.S.
dollar over the measuring period (3 years in this case) into U.S. dollars for the U.S.
pension plan. The Index mix lost 12.9% to the dollar reducing what would otherwise
have been a very favorable return from the various country markets of 19.9% to a net
return of only 7.0%.

9.
9(a). Evaluation begins with selection of the appropriate benchmark against which to measure
the firms’ results:

25 - 11
 Firm A. The Aggregate Index and “Managers using the Aggregate Index” benchmark are
appropriate here, because Firm A maintains marketlike sector exposures. Performance
has been strong; Firm A outperformed the Aggregate Index by 50 basis points and placed
in the first quartile of managers’ results.
Firm B. Firm B does not use mortgages; therefore, the Government/Corporate for both
index and universe comparisons would be the appropriate benchmark. Although Firm B
produced the highest absolute performance (9.3 percent), it did not perform up to either
the Index (9.5 percent) or other managers investing only in the Government/Corporate
sectors (third quartile).
Firm C. Like Firm A, this firm maintains broad market exposures and should be
compared with the Aggregate Index for both index and universe comparisons.
Performance has been good (30 basis points ahead of the index and in the second quartile
of manager results) but not as good as Firm A’s showing during this relatively short
measurement period.

9(b). Firm A does not show an observable degree of security selection skill (-10 basis points);
nor does it appear to be managing in line with its stated marketlike approach. Some large
nonmarketlike bets are driving return production (e.g., duration bets, +100 basis points;
yield curve bets, +30 basis points; and sector-weighting bets, -70 basis points) and
account for its +50 basis-point better-than-benchmark total return.

Firm C’s ability to anticipate shifts in the yield curve correctly is confirmed by the
analysis (its +30 basis points accounts for its entire observed better than-benchmark
outcome). In addition, its claim to maintain market-like exposures is also confirmed (e.g.,
the nominal differences from benchmark in the other three attribution areas).

9(c). Firm C produced the best results because its style and its expertise were confirmed by the
analysis; Firm A’s were not.

10(i). Dollar-Weighted Return

Manager L:
500,000 = -12,000/(1+r) - 7,500/(1+r)2- 13,500/(1+r)3 - 6,500/(1+r)4- 10,000/(1+r)5+
625,000/(1+r)5
Solving for r, the internal rate of return or DWRR is 2.75%

Manager M:
700,000 = 35,000/(1+r) + 35,000/(1+r)2+35,000/(1+r)3+35,000/(1+r)4+35,000/(1+r)5 +
625,000/(1+r)5
Solving for r, the internal rate of return or DWRR is 2.98%.

10(ii). Time-weighted return

Manager L:
Periods HPR
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 1 [(527,000 – 500,000) – 12,000]/500,000 = .03
2 [(530,000 – 527,000) – 7,500]/527,000 = -.0085
3 [(555,000 – 530,000) – 13,500]/530,000 = .0217
4 [(580,000 – 555,000) – 6,500]/555,000 = .0333
5 [(625,000 – 580,000) – 10,000]/580,000 = .0603

TWRR = [(1 + .03)(1 - .0085)(1 + .0217)(1 + .0333)(1 + .0603)]1/5 - 1

= (1.143) 1/5 – 1= 1.02712 – 1 = .02712 = 2.71%

Manager M:
Periods HPR
1 [(692,000 – 700,000) + 35,000]/700,000 = .03857
2 [(663,000 – 692,000) + 35,000]/692,000 = .00867
3 [(621,000 – 663,000) + 35,000]/663,000 = -.01056
4 [(612,000 – 621,000) + 35,000]/621,000 = .04187
5 [(625,000 – 612,000) + 35,000]/612,000 = .0784

TWRR = [(1 + .03857)(1 + .00867)(1 - .01056)(1 + .04187)(1 + .0784)]1/5 - 1

= (1.1646) 1/5 – 1= 1.03094 – 1 = .03094 = 3.094%

EV – (1 – DW)(Contribution)
10(iii). Dietz approximation method = - 1
BV + (DW)(Contribution)

In this case, DW = (91 – 45.5)/91 = 0.50

Manager L:
Periods HPY
1 [(527,000 – (1 -.50)(12,000)]/[500,000 + (.50)(12,000)] – 1
= (527,000 –6,000/(500,000 + 6,000) – 1 = 521,000/506,000 – 1 = .0296
2 (530,000 – (1 -.50)(7,500)]/[527,000 + (.50)(7,500)] – 1
= 526,250/530,750 – 1 = -.0085
3 (555,000 – (1 -.50)(13,500)]/[530,000 + (.50)(13,500)] – 1
= 548,250/536,750 – 1 = .0214
4 (580,000 – (1 -.50)(6,500)]/[555,000 + (.50)(6,500)] – 1
= 576,750/558,250 – 1 = .0331
5 (625,000 – (1 -.50)(10,000)]/[580,000 + (.50)(10,000)] – 1
= 620,000/585,00 – 1 = .0598

Manager M:
Periods HPY
1 [(692,000 – (1 -.50)(-35,000)]/[700,000 + (.50)(-35,000)] – 1
= (692,000 + 17,500/(700,000 – 17,500) – 1 = 709,500/682,500 – 1 = .0396
2 (663,000 – (1 -.50)(-35,000)]/[692,000 + (.50)(-35,000)] – 1
= 680,500/674,500 – 1 = .0089
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3 (621,000 – (1 -.50)(-35,000)]/[663,000 + (.50)(-35,000)] – 1
= 638,500/645,500 – 1 = -.0108
4 (612,000 – (1 -.50)(-35,000)]/[621,000 + (.50)(-35,000)] – 1
= 629,500/603,500 – 1 = .0431
5 (625,000 – (1 -.50)(-35,000)]/[612,000 + (.50)(-35,000)] – 1
= 642,500/594,500 – 1 = .0807

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