| Course | FIN-3210 Security Analysis and Portfolio Management |
|---|---|
| Module | Module 6 |
| Paper type | Written assignment 6: portfolio performance and international investing |
| Length | About 618 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | B.S.B.A. in Finance |
| Updated | October 2026 |
Free sample paper for FIN 3210 Module 6
The Fund That Returned Less Did Better: Performance Measures and Foreign Returns for a Trenton Household
Student Name
B.S.B.A. in Finance, Thomas Edison State University
FIN-3210: Security Analysis and Portfolio Management
Mentor Name
Month Day, Year
The Fund That Returned Less Did Better: Performance Measures and Foreign Returns for a Trenton Household
Problem 1: The Data
Fund X returned more than the market and more than Fund Y. The question is whether its managers added value or simply took more risk.
| Fund X | Fund Y | Market index | |
|---|---|---|---|
| Average annual return | 11% | 9% | 10% |
| Standard deviation | 18% | 12% | 15% |
| Beta | 1.2 | 0.8 | 1.0 |
| Risk-free rate | 3% | | |
Problem 2: Risk-Adjusted Measures
Every measure ranks Fund Y above the market and Fund X below it. Fund X's higher return came from taking more risk, both total risk and market risk, and it did not earn enough extra return to justify it: given its beta of 1.2, the CAPM predicted 11.4 percent, so its 11 percent is a shortfall of 0.4 points. Fund Y, with a beta of 0.8, was expected to earn 8.6 percent and earned 9, an alpha of 0.4 points. Jensen (1968) introduced this measure in a study that found most mutual funds did not outperform the market after risk adjustment, and Sharpe (1966) proposed the reward-to-variability ratio for the same purpose.
| Measure | Formula | Fund X | Fund Y | Market |
|---|---|---|---|---|
| Sharpe ratio | (r − rf) / σ | 0.444 | 0.500 | 0.467 |
| Treynor measure | (r − rf) / β | 6.67 | 7.50 | 7.00 |
| Jensen's alpha | r − [rf + β(rM − rf)] | −0.40% | +0.40% | 0 |
| M-squared | rf + Sharpe × σM − rM | −0.33% | +0.50% | 0 |
Problem 3: Choosing the Right Measure
The measures differ in what risk they count. The Sharpe ratio and M-squared use total risk and suit an investor for whom the fund is the whole or main portfolio. The Treynor measure and Jensen's alpha use only market risk and suit a fund that is one part of a well-diversified portfolio, where its unsystematic risk is diversified away. For the couple, the fund would be a large share of the librarian's 403(b), so the Sharpe ratio and M-squared are most relevant. M-squared has a practical advantage: it expresses performance as a return difference, here Fund Y beat the market by 0.5 points after adjusting to the market's risk, which is easier to explain than a ratio.
Problem 4: Investing Abroad
The couple is considering a European stock fund. Over the past year, the fund returned 8 percent in euros, and the euro rose 3 percent against the dollar. The dollar return is (1 + 0.08) × (1 + 0.03) − 1 = 11.24 percent. Had the euro fallen 3 percent, the dollar return would have been 1.08 × 0.97 − 1 = 4.76 percent. Exchange rate movements can add to or subtract from returns, an extra source of risk unless the fund hedges its currency exposure.
Problem 5: The Case for International Diversification
Foreign stocks do not move perfectly with U.S. stocks, so adding them can reduce a portfolio's risk, the same logic as the two-fund problem in Module 3. Bodie et al. (2017) note, however, that correlations among national markets have risen as economies and capital markets have integrated, especially during crises, which reduces the benefit when it is most needed. Investors also tend to overweight their home market, a pattern known as home bias, often holding far less abroad than diversification would suggest. For the couple, whose jobs, house and pension are all tied to the New Jersey economy, a moderate international allocation, perhaps a fifth to a quarter of their stock holdings, adds diversification at reasonable cost.
Conclusion
A higher raw return is not evidence of skill. Adjusted for risk, the lower-returning fund was the better choice, and the right measure depends on the fund's role in the couple's portfolio. International funds can reduce risk, but currency movements add their own uncertainty.
References
Bodie, Z., Kane, A., & Marcus, A. J. (2017). Essentials of investments (10th ed.). McGraw-Hill Education.
Jensen, M. C. (1968). The performance of mutual funds in the period 1945-1964. Journal of Finance, 23(2), 389-416. https://doi.org/10.1111/j.1540-6261.1968.tb00815.x
Sharpe, W. F. (1966). Mutual fund performance. Journal of Business, 39(1), 119-138. https://doi.org/10.1086/294846
Reading the FIN 3210 Module 6 assignment instructions
The sixth module pairs performance measurement with investing abroad. Expect to compute and compare risk-adjusted performance measures, the Sharpe ratio, Treynor measure, Jensen's alpha and M-squared, to explain which suits a given situation and to calculate returns on foreign investments including currency effects, along with the benefits and limits of international diversification. The funds and returns here are illustrative composites. Expect Sharpe, Treynor and Jensen's alpha calculations for several funds and questions on the risks and benefits of investing abroad. Some versions add a currency calculation for a foreign stock return. Use the funds' actual returns, betas and standard deviations from the problem, and compute Sharpe, Treynor and alpha for each before choosing.
Inside the FIN 3210 Module 6 example
Problem 1 sets out the data in a table and states the question the measures answer. Problem 2 computes four measures in a second table and explains why each ranks the funds the same way, with the CAPM-predicted returns shown and the measures' origins cited. Problem 3 explains when to use total-risk and market-risk measures and applies the choice to the household. Problems 4 and 5 compute dollar returns on a euro investment under two currency moves and weigh the case for international diversification. The ranking of funds is explained by which measure suits the investor's situation. A short section explains how currency moves changed a foreign return. The answer closes with the fund the investor should keep.
Reading the FIN 3210 Module 6 grading rubric
Choosing between plan funds with Sharpe, Treynor and alpha, and weighing a European fund, carry this grade. Mentors look for correct measures, an explanation of why they agree or differ, a reasoned choice of measure for the investor and correct currency calculations. Seeing that more return is not the same as better performance, and that going abroad both helps and has limits, is the judgment this module tests. Answers that choose the right risk-adjusted measure for the investor's situation, and explain currency risk abroad, show the judgment the module tests. Clear tables of the three measures support the ranking.
FIN 3210 Module 6 help from the desk
Performance problems lose points for comparing raw returns, for using beta in the Sharpe ratio or standard deviation in the Treynor measure and for adding the currency change to the local return instead of compounding them. Compute each measure with its own risk input. Say which suits the investor's situation and why. Compound local and currency returns. Discuss both the diversification benefit and the risk currency adds. A free first sample of your own FIN-3210 Module 6 problems is available on request. Use the Sharpe ratio for a whole portfolio and Treynor or alpha for a fund held as one part of a diversified portfolio. Name the benchmark and risk-free rate you used for each measure.
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FIN 3210 Module 6 questions, answered
Where can I find a free FIN 3210 Module 6 sample paper?
The Trenton household problem set above computes the Sharpe, Treynor, Jensen and M-squared measures for two funds and the dollar return on a euro investment.
What is Jensen's alpha?
What a fund earned beyond the CAPM return its beta implies.
When should the Sharpe ratio be used instead of the Treynor measure?
When the portfolio is the investor's main holding, so total risk matters; Treynor suits a fund held within a diversified portfolio.
How do exchange rates affect foreign investment returns?
The dollar return equals one plus the local return times one plus the currency change, minus one.
What is M-squared?
A measure that adjusts a portfolio's risk to match the market's and reports the resulting return difference in percentage points.