11 - The performance of investment performance Flashcards
Past performance data is essential for:
Understanding markets
Assessing/rewarding managers
Charging performance-related fees
What are some limitations for predicting investment performance
Underperformance of equities
Historic performance may diminish when too specific
Volatility may not be the same
What is money weighted return
Measures overall return on capital invested over a specific period
What is time weighted return
Allows comparisons to be made of performance of different fund managers
What is holding period return
Return over time of investment, expressed as a percentage of original cost
Holding period return formulae
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
Relative return
Definition
Return from investment or portfolio measured against return from benchmark index
Relative return Formuale
RRel = r-rb
r = total - holding period return
rb = benchmark return
Money weighted return
Modified form of holding period return formula used to calculate return over year, adjusting for cash flow
MWR formulae
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
What is a drawback of MWR
Relies on timing of cashflows
What is time weighted return
Compare performance of one fund manager to another eliminating distortion caused by timing of new money
General formulate for TWR
What is sharpe ratio
Measure return of investment after adjusting for a risk
Sharpe Ratio formulae
(return on investment - risk free investment)/ standard deviation of the return on investment
What is Alpha (Jensen Alpha)
Difference between return you would expect from a security (Given beta) and return actually produced
Alpha positive
Security performed better given beta prediciton
Alpha negative
Security performed worse given beta prediciton
What is value added sometimes referred to
Alpha
Formulae for Alpha
Actual portfolio return - [Rf + Bi(Rm - Rf)
Rf = risk free rate
Bi = beta of fund or portfolio
Rm = Market return
What is the calculation time for CAPM using historic data
Monthly raeturns over last 3 years
What is information ratio
Used to assess the risk-adjusted performance of active portfolio managers
Information ratio formulae
(Rp-Rb)/ tracking error
Rp = portfolio or fund return
Rb = benchmark return
If there is a negative information ratio what does that mean
A tracker or index fund is better
How do portfolio managers achieve good or bad results
Asset Allocation
Stock selection
Market timing
Risk
What are the steps before choosing investment
Benchmark
Benchmark Asset allocation
Benchmark returns
Comparison of Asset Allocation
Stock selection
