11 - The performance of investment performance Flashcards

1
Q

Past performance data is essential for:

A

Understanding markets
Assessing/rewarding managers
Charging performance-related fees

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2
Q

What are some limitations for predicting investment performance

A

Underperformance of equities
Historic performance may diminish when too specific
Volatility may not be the same

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3
Q

What is money weighted return

A

Measures overall return on capital invested over a specific period

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4
Q

What is time weighted return

A

Allows comparisons to be made of performance of different fund managers

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5
Q

What is holding period return

A

Return over time of investment, expressed as a percentage of original cost

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6
Q

Holding period return formulae

A

R = (D+ V1 + V0)/ v0

D = income received in period
V1 = Value of portfolio at end of period
V0 = Value of portoflio at start of period

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7
Q

Relative return

Definition

A

Return from investment or portfolio measured against return from benchmark index

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8
Q

Relative return Formuale

A

RRel = r-rb

r = total - holding period return
rb = benchmark return

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9
Q

Money weighted return

A

Modified form of holding period return formula used to calculate return over year, adjusting for cash flow

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10
Q

MWR formulae

A

MWR = (D + V1 + V0 - C)/(V0 +(C*n/12))

D = income
V1 = portfolio end period
V0 = portfolio start period
c = new money introduced during the year
n = number of months remaining in the year

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11
Q

What is a drawback of MWR

A

Relies on timing of cashflows

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12
Q

What is time weighted return

A

Compare performance of one fund manager to another eliminating distortion caused by timing of new money

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13
Q

General formulate for TWR

A
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14
Q

What is sharpe ratio

A

Measure return of investment after adjusting for a risk

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15
Q

Sharpe Ratio formulae

A

(return on investment - risk free investment)/ standard deviation of the return on investment

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16
Q

What is Alpha (Jensen Alpha)

A

Difference between return you would expect from a security (Given beta) and return actually produced

17
Q

Alpha positive

A

Security performed better given beta prediciton

18
Q

Alpha negative

A

Security performed worse given beta prediciton

19
Q

What is value added sometimes referred to

20
Q

Formulae for Alpha

A

Actual portfolio return - [Rf + Bi(Rm - Rf)

Rf = risk free rate
Bi = beta of fund or portfolio
Rm = Market return

21
Q

What is the calculation time for CAPM using historic data

A

Monthly raeturns over last 3 years

22
Q

What is information ratio

A

Used to assess the risk-adjusted performance of active portfolio managers

23
Q

Information ratio formulae

A

(Rp-Rb)/ tracking error

Rp = portfolio or fund return
Rb = benchmark return

24
Q

If there is a negative information ratio what does that mean

A

A tracker or index fund is better

25
How do portfolio managers achieve good or bad results
Asset Allocation Stock selection Market timing Risk
26
What are the steps before choosing investment
Benchmark Benchmark Asset allocation Benchmark returns Comparison of Asset Allocation Stock selection