11 - The performance of investment performance

Question 1

Past performance data is essential for:

Answer 1

Understanding markets
Assessing/rewarding managers
Charging performance-related fees

Question 2

What are some limitations for predicting investment performance

Answer 2

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

Question 3

What is money weighted return

Answer 3

Measures overall return on capital invested over a specific period

Question 4

What is time weighted return

Answer 4

Allows comparisons to be made of performance of different fund managers

Question 5

What is holding period return

Answer 5

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

Question 6

Holding period return formulae

Answer 6

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

Question 7

Relative return

Definition

Answer 7

Return from investment or portfolio measured against return from benchmark index

Question 8

Relative return Formuale

Answer 8

RRel = r-rb

r = total - holding period return
rb = benchmark return

Question 9

Money weighted return

Answer 9

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

Question 10

MWR formulae

Answer 10

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

Question 11

What is a drawback of MWR

Answer 11

Relies on timing of cashflows

Question 12

What is time weighted return

Answer 12

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

Question 13

General formulate for TWR

Question 14

What is sharpe ratio

Answer 14

Measure return of investment after adjusting for a risk

Question 15

Sharpe Ratio formulae

Answer 15

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

Question 16

What is Alpha (Jensen Alpha)

Answer 16

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

Question 17

Alpha positive

Answer 17

Security performed better given beta prediciton

Question 18

Alpha negative

Answer 18

Security performed worse given beta prediciton

Question 19

What is value added sometimes referred to

Answer 19

Alpha

Question 20

Formulae for Alpha

Answer 20

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

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

Question 21

What is the calculation time for CAPM using historic data

Answer 21

Monthly raeturns over last 3 years

Question 22

What is information ratio

Answer 22

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

Question 23

Information ratio formulae

Answer 23

(Rp-Rb)/ tracking error

Rp = portfolio or fund return
Rb = benchmark return

Question 24

If there is a negative information ratio what does that mean

Answer 24

A tracker or index fund is better

Question 25

How do portfolio managers achieve good or bad results

Answer 25

Asset Allocation
Stock selection
Market timing
Risk

Question 26

What are the steps before choosing investment

Answer 26

Benchmark
Benchmark Asset allocation
Benchmark returns
Comparison of Asset Allocation
Stock selection