1

Executive Summary
Main differences of Zeus from its main competitor are its customer-oriented services,
their core strategy of teamwork and they used municipal bond fund to purchase
securities. Estimation of risk-adjusted returns is important to Zeus as In Zeus opinion,
investors will not pay for the higher return generated by merely taking the higher risk.
Investors demand Zeus to utilise professional skills to provide them with a return above
the benchmark. There are also advantages and disadvantages of each of the risk-
adjusted return measures employed, making some of them to be better applied to a
specific type of fund comparison than the others.

Introduction:
Zeus Asset management is a fund management firm founded in 1968 in Atlanta, which
is an independent, employee-owned, money management firm in southwest, providing
services to both institutional and individual investors. The firms investment philosophy
believes that conservative, risk-averse, quality-oriented approach will bring about
superior performance.

Zeus unique characteristics:
Zeus is very different from its competitors. Firstly, they are well known for its
customer-oriented services. Most of the employees served their customers directly.
Each employee was engaged in pursuing the clients investment objectives and
dilligently managing their portfolios. This customer-oriented approach gives them a
competitive advantage in these high-net-wealth-individuals market.

Furthermore, teamwork was the core of Zeuss strategy, more than 75% of its
investment professionals were CFAs and the average investment professional is aged at
44. Thus, they have more experience than the other competitors in the industry

In addition, Zeus believed that risk minimization and long term investment could get a
better result than high return high frequency trading in short term. Thus they tend to
allocate asset to long-term movement and also in medium-to-large capital growth fund
due to the lower risk nature of these portfolios.

2
Finally, Zeus developed a unique approach, municipal bond fund, to purchase securities.
The portfolio manager could buy municipal bonds at more attractive prices and be
offered more attractive bonds by dealers.

Financial performance measurement
Absolute return is a way of measuring a portfolio performances based on the total return
on investment over a certain period. Absolute return can be calculated by the hold
period return calculation and present value of future estimated expected return.
Although this method can calculate the profit or loss of a portfolio, it is not able to
provide a robust analysis and the comparison the performance between the portfolios
with others.

On the other hand, the Relative return method is able to provide the comparison of the
performance of a portfolio with a benchmark. It allows checking whether a portfolio is
outperforming or underperforming the market. It can also be used to measure the
performance of more than one portfolios or companies.

However, both methods cannot be relied upon solely to measure the performance a
portfolio, because they are unable to catch the relative risk of a portfolio. High return is
always associated with high risk. If an investor invests in high beta stocks or junk
bonds, he is more likely to get a high return, while it does not means that the investment
is outperforming the market. Thus, risk-adjusted is a more precision measure method to
measure the return from the portfolio per unit of risk and it also can be used to compare
portfolio performance with portfolio of different risks. In Zeus opinion, investors will
not pay for the higher return generated by merely taking the higher risk. Investors
demand Zeus to utilise professional skills to provide them with a return above the
benchmark.

Different methods for Risk-adjusted return:
Sharpe ratio: measure the excess returns generated by a portfolio above the risk free
rate in relation to return.

Advantages:
3
Directly computable from any observed series of returns without needing for
additional information surrounding the source of profitability.
Measuring systematic and idiosyncratic risk.

Disadvantages:
Merely a ranking criterion. Number value is not economically meaningful
Normal distribution assumption result in bias.
Treynor ratio: measure return in excess of the risk free rate relative to systematic risk.

Advantages:
It can be compared with the benchmark performance or other portfolio with the
same benchmark.

Disadvantaged:
Only useful as a sub-portfolio measure of a board or fully diversified portfolio.

Jasens Alpha: measures the average return on portfolio over and above that predicted
by CAPM.

Limitation: An absolute measure does not adjusted for any risk. It is not able behave
proportionally to the level of required return of portfolio.

Information ratio: the information ratio divides the alpha of the portfolio by the
nonsystematic risk.

Limitation: it relies on a measure of standard deviation. It does not present the
averaging property.
For Zeus, risk-adjusted return is very important due to several reasons:
By analyzing the performance of the various mutual funds, it would help the
company to establish its internal rules regarding the level or risk and return.
They can use this method to measure the excess return they earned for each unit
of risk they take.
4
It is more comparable to the benchmark and other portfolios with different
structure and risk level.

Benchmark comparison
Equity fund:
Zeuss equity fund aim for long-term growth of capital through investments in a high-
quality portfolio of stocks, whose earning are expected to grow at above-average rates.
Focusing more on Growth securities, which is consistent with the philosophy of risk-
averse investment strategy.

In this case, equities are compared with both S&P 500 and Lipper Growth indices
(Annex A). When compared with S&P 500 index, the sharpe ratio can be applied to
compare between the portfolio and index. Since only growth stocks is in the portfolio, it
cannot be diversified enough. In the first subperiod, the portfolios sharpe ratio is lower
than S&P 500 index. The main reason is that the fund followed a weak cash policy, over
or underweighted in cash, depending on the valuation of the market. However, the
performance is improved in the second subperiod. When compared with Lipper Growth
Index, we should compare the treynor ratio between them, as the portfolio is diversified
enough. Similar to previous observation, the portfolio performed better during the
second subperiod and outperform the Index performance. The alpha figures and
information ratio show a similar result.

Bond fund:
The bond fund aims to maximize total return in a way that was consistent with the
preservation of capital. Due to the lack of capacity of purchasing all marketable in the
Lehmann Brothers Aggregate index, the portfolio is not well diversified. Compared to
Lehmann Brother Aggregate index, the sharpe ratio is suitable to compare the
performance between the portfolio and index. According to the figure calculated below
(Annex B), the portfolio performance improved immensely in the second subperiod. In
addition, the information ratio of 1.096667 in the second subperiod also illustrates the
active risk is low. The improvement could be attributed to portfolios specialists
concentrating on each sector, thoroughly scouring each one, and finding attractively
priced securities. Besides, the application of a powerful computer models helped
identify arbitrage opportunities in different sector of the bond markets. They also use
5
bond-synthesizing to create coupon and maturity payments that were higher yielding
than an equivalent risky bond.

Balance fund:
The nature of balance fund, which is combined by equity and bonds, make it become
diversified. This is very well diversified portfolio, which combined the high return of
equity and the low risk of bonds. Hence, beta and treynor ratio can be used to measure
the performance. Similar with the other portfolio, balance fund also has a superior
performance in the second subperiod. Similar with the market beta, the higher treynor
ratio and a positive alpha suggest the superior performance of the fund (Annex C).

International fund:
The original intention of applying international fund is to diversify the portfolio of
companies. However, based on the figures (Annex D), the funds beta is actually higher
than MSCI index. With the increase in risk, the return of the portfolio is also increased
significantly. The high sharpe ratio, Treynor ratio, positive Jensens Alpha and
information ratio show that the portfolio is outperforming. The high risk is not
consistent with the companys philosophy.

Conclusion:
Risk-adjusted return can help investment professionals in Zeus to have more robust
analysis regarding the portfolio performance. However, other qualitative aspects should
also be taken to account, such as their employees quality and experience, the corporate
government of the company, as well as their relationship with clients. Overall, the
company is relatively successful in terms of aspects analyzed above.


6
Appendix

Annex A

Equities
Fund

zeus equity
fund
Lipper growth
index
s&p 500
index
BETA subperiod1 0.8435 0.975 1
subperiod2 0.8852 0.9323 1
whole period 0.8758 0.9428 1

sharp ratio subperiod1 0.5514 0.6835 0.9295
subperiod2 1.7394 1.6072 2.0383
whole period 1.1924 1.1792 1.5201

treynor ratio subperiod1 0.0507 0.0619 0.07486
subperiod2 0.2298 0.2177 0.2463
whole period 0.1389 0.1385 0.1609

Jesen's
Alpha
subperiod1 -0.0018 0.0012
subperiod2 -0.001 -0.0017
whole period -0.0014 -0.0015

inforamtion
ratio
subperiod1 -0.6189 -0.66255
subperiod2 -0.61269 -0.77794
whole period -1.21617 -1.04081

Annex B
Bonds Fund
zeus bond fund lehman brothers
aggregated index
BETA subperiod1 0.8318 1
subperiod2 0.899 1
whole period 0.8645 1

sharpe ratio subperiod1 0.7455 0.959
subperiod2 10,258 0.9212
whole period 0.8899 0.9458

treynor ratio subperiod1 0.0341 0.0429
subperiod2 0.0457 0.0403
7
whole period 0.0401 0.0416

Jesen's Alpha subperiod1 -0.0006
subperiod2 0.0004
whole period -0.0001
information ratio subperiod1 -1.79757
subperiod2 1.096667
whole period -0.41387

Annex C
Balance Fund
zeus balanced fund lipper balanced index
BETA subperiod1 1.006 1
subperiod2 1.0021 1
whole period 1.0064 1

sharpe ratio subperiod1 0.3489 0.7717
subperiod2 1.2431 1.087
whole period 1.3987 0.9207

treynor ratio subperiod1 0.0309 0.0653
subperiod2 0.0986 0.08
whole period 0.0311 0.0268

Jesen's Alpha subperiod1 -0.0026
subperiod2 0.0014
whole period -0.0006

inforamtion
ratio
subperiod1 -2.35665
subperiod2 1.436681
whole period -0.81721

Annex D
International Fund
zeus international
fund
MSCI index
BETA subperiod1
subperiod2
whole period 1.088 1

sharpe ratio subperiod1
subperiod2
whole period 0.0308 -0.4001
8

treynor ratio subperiod1
subperiod2
whole period 0.0046 -0.05328

Jesen's Alpha subperiod1
subperiod2
whole period 0.0054

information
ratio
subperiod1
subperiod2
whole period 1.119824