Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CISI - Portfolio Construction Theory in Wealth Management > Chapter 10 > Flashcards

Chapter 10 Flashcards

1
Q

The statistics used to measure performance must meet which requirements? (5)

A
  • Unambiguous
  • Investable
  • Measurable
  • Appropriate
  • Specified in advance
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

For performance evaluation, what does unambiguously mean?

A

weights of securities and factor exposures of benchmarks are clearly defined

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

For performance evaluation, what does an investable benchmark mean?

A

can stop active management and just buy the benchmark as a passive portfolio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

For performance evaluation, what does measurable mean?

A

returns and risk of portfolio can be calculated quickly and frequently

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

For performance evaluation, what does an appropriate benchmark mean?

A

the benchmark is consistent with the manager’s investment style or area of expertise

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

For performance evaluation, what does specified in advance mean?

A

stated on the IPS and is known to all parties

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is peer group benchmarking?

A

has the manager outperformed peer group’s median performance?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a critique of peer group benchmarking? (3)

A

the investment decision will be based on what other fund managers are doing

creates herding mentality

everyone else could be bad but the least bad will be shown as the best - even though absolute performance is still poor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

When is customised benchmarking appropriate? (2)

A

asset allocation decision and stock selection decisions are separable

e.g. asset allocation decided by trustee, stock selection done by fund managers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What happens when limits set on customised benchmarking are set tight?

A

might make the portfolio a pseudo tracker

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

For performance evaluation, what is objectivity?

A

historic performance is analysed against some baseline

not open to dispute

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

For performance evaluation, what is subjective? (3)

A

involves making predictions about the future

there is no way to perfectly model economic systems

use subjective views

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Why is performance evaluation required?

A

compares managers’ performance

show if portfolio meets requirements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is absolute performance?

A

an absolute return can simply be a return objective, without reference to any another benchmark or similar comparator

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does absolute performance aim to show?

A

whether total return is commensurate with total risk experience

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What should a suitable performance measure include?

A

return target and risk target

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How does an absolute performance measure help an investor?

A

helps understand whether return offered is appropriate to level of risk taken

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is relative performance?

A

return compared to benchmark or peers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What are the three standard risk-adjusted measures?

A

jensens
sharpe
treynor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is jensens measure?

A

post alpha return

uses beta

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is sharpe ratio?

A

return of portfolio measured in standard deviation terms

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is the Treynor ratio?

A

scales returns in terms of beta

23
Q

What is the appraisal ratio?

A

An appraisal ratio is a ratio used to measure the quality of a fund manager’s investment-picking ability. The ratio shows how many units of active return the manager is producing per unit of risk

24
Q

What is the appraisal ratio useful for?

A

active management within a portfolio by reference to the performance of a passive tracker fund

25
Q

How do you calculate the appraisal ratio?

A

Appraisal ratio = portfolio alpha / portfolio unsystematic risk

26
Q

What does the appraisal ratio tell you?

A

if exceeds benchmark sharpe ratio, then active performance produced superior returns

27
Q

What does the information ratio measure?

A

manager’s skill

28
Q

how to calculate information ration?

A

IR = excess return / excess standard deviation

29
Q

How to calculate sharpe ratio?

A

Sharpe ratio = (Return of fund - risk free rate)/standard deviation of fund

30
Q

How to calculate Treynor ratio?

A

Treynor ratio = (return of fund - risk free rate)/beta of fund

31
Q

What does a higher IR mean? (2)

A

higher information ratio

higher active return given the amount of risk taken

32
Q

Difference between sharpe ratio and IR?

A

shapre ratio based on risk free rate

IR based on benchmark performance

33
Q

What does VaR tell?

A

the expected maximum loss over a given time at a specified confidence level

34
Q

What does the CVaR tell?

A

the expected, probability-weighted average loss, that is conditional on the loss being equal to or greater than VaR

35
Q

What is a disadvantage of VaR and CVaR?

A

they assume that return distributions are normal

36
Q

How can VaR and CVaR be improved upon? (4)

A
  • add asymmetry
  • skewness and kurtosis
  • requires monte-carlo simulations
  • too advanced numerical procedure
37
Q

What is a criticism on volatility?

A

It makes no distinction between positive and negative returns and it assumes returns will be normally distributed

38
Q

How does Parametric VaR help?

A

improves on volatility by only considering negative returns, but still assumes a normal distribution

39
Q

What does drawdown show?

A

loss of value in currency terms relative to a high-water mark

40
Q

By tracking the evolution of a drawdown index over a period of time, a portfolio/fund manager can determine what values? (3)

A
  • worst drawdown
  • average drawdown
  • longest drawdown period to recovery
41
Q

What is r-squared?

A

is a statistical value which is associated with the correlation coefficient and linear regression

42
Q

What does a high r-squared show?

A

the greater the confidence we can have that there is a strong relationship between two variables

43
Q

If the correlation coefficient is 0.9, what is r-squared?

A

0.81

44
Q

What does a value of 0.81 for r-squared say?

A

81% of co-movement between the variables is explained by the linear equation

the other 19% is not explained by the variables in the regression

45
Q

What return do you use to deduct from the fund return when calculating the sortino ratio?

A
  • returns less than the target requirement or reference rate
46
Q

What is the risk used in the calculation of sortino ratio?

A
  • standard deviation of returns below the target return or reference rate
47
Q

What is the expense ratio?

A

a measure of the total cost of investing in a fund

48
Q

what is included in the expense ratio? (3)

A

management
operation
administrative fees

as a percentage of the total assets managed

49
Q

How to calculate total expense ratio (TER)?

A

TER = operating expenses/average monetary value of AUM

50
Q

How often is TER calculated?

A

The TER is calculated at least once a year on an ex-post basis and is provided in a fund’s annual reports.

51
Q

How does ongoing charges figure (OCF) differ from the TER?

A

it does not include any performance fees which should be disclosed separately by the fund manager

52
Q

What is OCF?

A

ongoing or recurring charges

53
Q

What analysis might TER or OCF become less relevant? (2)

A

performance evaluation uses historical data

performance analysis should have deducted fees and charges already

54
Q

What does the FCA recommend regarding OCF?

A

be used consistently in all marketing material for UCITS

CISI - Portfolio Construction Theory in Wealth Management (15 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions