13. Assessing Performance

Question 1

What is the calculation for holding period/money-weighted/total return?

Answer 1

Investment gain
Original Investment

+ income

Question 2

How do you annualise a return?

Answer 2

Return to the power of no. periods in a year

e.g 5% over 3 months = 1.05x1.05x1.05x1.05 = 1.215 / 21.5% annualised (4x 3-month periods in a year)

Question 3

What is the Sharpe ratio?

Answer 3

Return - risk-free return
__________________________
Standard deviation

Additional return per unit of risk; higher = better

Question 4

What is the Information ratio?

Answer 4

Return - benchmark return
____________________________
Tracking error

Measures fund’s risk-rated return; higher = better

Question 5

Key features of the following:
FTSE100
FTSE All-share
Dow Jones
NASDAQ
Nikkei 225

Answer 5

• FTSE100; c.80% UK market cap. Real-time and weighted
• FTSE All-share; c.99% UK market cap. Updated daily
• Dow Jones; 30 blue chip co’s on NYSE
• NASDAQ; 3000 companies, majority tech, including non-US
• Nikkei 225; unweighted (mean price)

Question 6

What is performance attribution and how is it calculated?

Answer 6

Assessing performance of fund manager

• Calculate benchmark return weighted by benchmark sector allocation
• Calculate actual return weighted by benchmark sector allocation
• Compare actual vs benchmark by sector

Question 7

What is peer group analysis?

Answer 7

Comparing a fund to a similar one