Investment Manager Selection

Correct Answer: The firm should select Manager A. While Manager B has higher returns, the additional risk taken, as evidenced by the higher standard deviation, may not align with the firm's equal emphasis on risk and return. Manager C's risk-adjusted returns are likely lower than Manager A's, given the matching of benchmark returns with lower volatility. Manager A's consistent outperformance and moderate risk profile make it the most suitable choice considering the firm's balanced approach to risk and return.

Manager A is the best choice for the investment management firm, given their equal emphasis on risk and return. Manager A has consistently outperformed the benchmark by 2% annually over the past 5 years, demonstrating skill in generating excess returns. Importantly, Manager A achieved this with a standard deviation of 15%, which is a moderate level of risk. In contrast, while Manager B has higher annual outperformance of 3%, they took on significantly more risk, with a standard deviation of 20%. The additional risk may not be justified by the incremental return, considering the firm's balanced approach. Manager C matched the benchmark returns with lower risk, but their risk-adjusted returns are likely inferior to Manager A's. Outperforming the benchmark, even by a smaller margin, while keeping risk moderate, is preferable to simply matching benchmark returns. Therefore, Manager A's track record of consistent outperformance and reasonable risk management makes them the most suitable choice for the firm's global equity mandate.

Correct Answer: Manager B would be the most suitable choice. They have demonstrated the ability to match the benchmark return while exhibiting lower volatility, which aligns with the investment committee's focus on risk management. Consistency and downside protection are key considerations for this allocation.

Manager B is the most appropriate choice for this mandate. The investment committee has emphasized the importance of risk management in the manager selection process. Manager B has demonstrated the ability to match the benchmark return over the past 5 years while exhibiting lower volatility compared to the benchmark. This track record aligns well with the committee's focus on risk management. Manager A's higher volatility is a concern, despite the outperformance. The excess returns may not justify the increased risk, particularly given the committee's emphasis on downside protection. Manager C's significantly lower volatility is attractive from a risk management perspective, but the consistent underperformance relative to the benchmark is a drawback. The investment committee may not be willing to sacrifice returns to this extent. Ultimately, Manager B offers the best balance between matching the benchmark returns and providing a lower volatility profile, making them the most suitable choice for this allocation.

Correct Answer: Manager C. Although Manager C has a lower absolute return compared to Managers A and B, it has the highest Sharpe ratio, indicating superior risk-adjusted returns. Given the investment committee's emphasis on risk management, Manager C's track record of generating returns with lower volatility makes it the most suitable choice for this emerging markets debt mandate.

Manager C is the best choice for this emerging markets debt mandate. The key factor here is the investment committee's preference for a manager with a strong risk-adjusted return profile. While Manager C has a lower annualized return of 6% compared to the other managers, it boasts the highest Sharpe ratio of 1.2, indicating superior risk-adjusted performance. The Sharpe ratio measures the excess return earned per unit of volatility or risk. A higher Sharpe ratio signifies better risk-adjusted returns. Manager C's high Sharpe ratio suggests that it has been able to generate relatively stable returns with lower volatility, aligning well with the committee's risk management focus. Manager A, despite its higher annualized return of 8%, has a lower Sharpe ratio of 0.8, implying that its returns come with higher risk. Similarly, Manager B's 7.5% annualized return and 0.9 Sharpe ratio, while balanced, do not match Manager C's risk-adjusted performance. In the context of an endowment fund, where capital preservation and consistent returns are often prioritized over chasing the highest absolute returns, Manager C's approach of delivering returns with lower volatility makes it the most suitable choice for this mandate.