Chapter 11 - Measuring Portfolio Performance

Question 1

FTSE All Share Index

Answer 1

Tracks the market value of the FTSE 100, 250 and small cap. Consisting of over 500 companies

Question 2

FTSE 100

Answer 2

Tracks the 100 biggest companies listed on the london stock exchange

Question 3

FTSE 250

Answer 3

Tracks companies ranked 101 to 350 by the market cap. Reviewed every quarter

Question 4

FTSE 350

Answer 4

Combination of FTSE 100 and 250

Reviewed quarterly

Question 5

FTSE Small Cap

Answer 5

Made up of companies too small for the top 350.

Question 6

FTSE Fledgling

Answer 6

Too small for the FTSE All-share but will still show the FTSE UK Series.

Question 7

Money-weighted rate of return

Answer 7

Used to calculate the return over the year, adjusting for cash flows.

When new funds are invested of withdrawn during the year, the calculation is modified to allow differences in the timing.

Question 8

Drawbacks of MWR

Answer 8

MWR method of measuring returns is not considered appropriate when trying to evaluate and compare different portfolios.

This is because it is strongly influenced by the timing of cash flows, these timings could be outside of the fund managers control and is often decided by the client.

Question 9

Time-weighted rate of return

Answer 9

TWR compares the performance of one fund manager to that of another by eliminating distortions caused by the timing of new money.

Question 10

What rate of return can be used for comparative purposes?

Answer 10

MWR can be used to calculate a valid rate of return for an individual portfolio, but it gives misleading results if it is used for comparative purposes.

TWRs are universally used for comparative purposes because they are not affected by the timing of cash flows and different new money inflows.

Question 11

Sharpe Ratio

Answer 11

Sharpe ratio is commonly used to measure the return of an investment by adjusting for its risk.

The higher the Sharpe ratio the better the return on an investment compensates an investor for the risk taken.

Negative Sharpe ratio indicates that a risk-free asset would have performed better than the investment being analysed

Question 12

Alpha

Answer 12

Alpha is the difference between the return you would expect from a security, given its beta and the return that it has actually produced.

Alpha allows us to quantify the value added of taken away by a manager through active management, since it is the return not explained by the CAPM

Question 13

Information Ratio

Answer 13

Used to assess the risk-adjusted performance of active portfolio managers. It is often used to gauge the skill of a fund manager and shows consistency with which a manager beats a benchmark index.

Question 14

Negative Information Ratio

Answer 14

A negative information ratio means that an investor would probably have achieved a better return by matching the index using a tracker or index fund.