9 - The performance of investments

Question 1

What is the difference between performance measurement and performance evaluation?

Answer 1

PM - calculation of an investment return over a period of time
PE - Whether the investment manager added value by meeting or exceeding a suitable benchmark and how the investment manager achieved the calculated return

Question 2

What is the difference between a money weighted return and a time weighted return?

Answer 2

MWR - measures the overall return on capital invested over a specific period
TWR - allows comparisons to be made of different fund managers

Question 3

What does R, Vo, V1, C, n and D mean in relation to holding and money weighted returns?

Answer 3

R = holding period of return
Vo = the value of the portfolio at the start of the period
V1 = the value of the portfolio at the end of the period
C = the new money introduced during the year
D = the income received during the period
n = the number of months remaining in the year

Question 4

If £25K was invested, £1000 was paid out as income and is worth £28k at the end of the period, what is the % growth?

Answer 4

1000 + 28000 - 25000/25000- = 0.16

16%

Question 5

A portfolio is worth £20K at the beginning of the year and £24K at the end of the year and £3K was invested at the end of March and £2000 is withdrawn at the end of September, what would the MVR be?

Answer 5

24K (ignore funds invested) - 20K - 1K / 3000/20K + (3000 x 9/12) + (-2000 x 3/12) = 13.79%

With no cash flow MWR = V1 -Vo/Vo

Question 6

What are the drawbacks of using MVR?

Answer 6

Because it is strongly influenced by cash flow which is outisde a managers control

Question 7

What is the Sharpe ratio?

Answer 7

A measure of the risk adjusted return of an investment

Return on investment - risk free return/standard deviation of the return on the investment

Question 8

An investment portfolio has an annual rate of return of 10%, compared to a 4% return from a risk free investment. The standard deviation of the portfolio is 8%. What is the portfolio return above the risk free rate for each unit of risk taken?

Answer 8

10.0 -4.0 / 8.0 = 0.75

Question 9

If Sharpe ratio had a negative return, what would that indicate?

Answer 9

That a risk free asset would have performed better

Question 10

If a portfolio had and annualised return of 9.5% , the standard deviation 8% and the risk free investment is 3.5 & what is the Sharpe ratio?

Answer 10

0.75

Question 11

What does a positive and negative aplha mean?

Answer 11

Positive - the security has performed better than predicted by the beta

Negative - the security has underperformed that the predicted beta

Question 12

Calculate the alpha of a fund that has provided an average return of 12% per year. If the fund has a beta of 1.5, the return on market was 8% and the risk free rate was 2%

Answer 12

1%

Question 13

Calculate the information ratio for a fund that has provided an average return of 13% per year compared with a benchmark return of 10%, if the fund has a tracking error of 6%?

Answer 13

0.5

Question 14

What are the steps you would go through to asses the success or failure of a portfolio by performance evaluation?

Answer 14

1. Choose an appropriate benchmark
2. Find out the benchmark asset allocation
3. Calculate the return in each asset class in the benchmark portfolio if it had performed in line with the index for its sector
4. Compare this benchmark or model performance wiht the actual portfolio performance in terms of the asset allocation assuming that : the asset allocation is the same as the managers portfolio & performance of each class of asset is the index performance (rather than actual)
5. calculate th effect of stock selection on each sector choice