8 - Portfolio Performance and Review (5/80)

Question 1

Benchmark Requirements

Answer 1

1. Unambiguous
2. Investable (i.e. should be able to purchase it)
3. Measurable
4. Appropriate
5. Specified in advance

Question 2

3 Benchmarking Methods

Answer 2

1. Against an index
2. Against a bundle of similar funds
3. Against a custom benchmark

Question 3

Global Investment Performance Standards (GIPS)

Answer 3

Standardise the reporting, calculating and presenting of figures

Question 4

IC Select Fiduciary Management Standards

Answer 4

Standardise comparisons between fiduciary managers for pension funds

Question 5

MSCI PIMFA Wealth Management Benchmarks

Answer 5

Performance benchmarks for risk-rated model portfolios

e.g. ‘Income - Cautious’ benchmark returns X

Question 6

3 Types of Index (Weighting)

Answer 6

1. Price-weighted (expensive stocks have more influence)
2. Market-cap weighted (bigger companies have more influence)
3. Equal-weighted

Question 7

Portfolio Performance Attribution

Answer 7

Shows how much of a fund’s performance was due to active management
Compares against a benchmark using market performance for each asset class

[Start Value x Fund Weights x Fund Performance]
(less)
[Start Value x Benchmark Weights x Benchmark Performance]

Outperformance comes from

1. Asset allocation (e.g. 20% more to equities than benchmark)
   - > Calculate (portfolio weight - benchmark weight) x benchmark performance
2. Security selection (e.g. same equity weight but performed 3% better)
   - > Calculate (portfolio return - benchmark return) x benchmark weights

Question 8

Portfolio Measures

Answer 8

1. R-Squared = relationship to benchmark
2. Alpha
3. Beta
4. Information Ratio = active manager skill
5. Sharpe Ratio = return per unit of risk
6. Volatility
7. Max loss = most amount possible to lose under normal conditions
8. Max drawdown = difference between highest and lowest points

Hit rate = number of successful trades
Win ratio = winning trades / losing trades

Question 9

Holding Period Return for Foreign Currency Investments

Answer 9

(1 + Rd) = (1 + Rf) x (1 + Rfx)

Rd = domestic HPR
Rf = foreign HPR
Rfx = HPR gained on the foreign exchange

Question 10

Reward to Risk Ratio

Answer 10

Expected Profit / Potential Loss

Used to gauge whether a trade is worth making

Question 11

Portfolio Review Factors

Answer 11

1. Changes in client circumstances
2. Changes in financial environment
3. New products/services

Question 12

Portfolio Review Processes

Answer 12

Requires strict admin to diarise and organise etc.
Can include shortened KYC questionnaire
Must communicate all portfolio changes

Question 13

Market Cap Weighted Indices

Answer 13

S&P 500
MSCI World
NASDAQ

Question 14

Price Weighted Indices

Answer 14

DJIA/Dow Jones

Nikkei 225