Chapter 23

Question 1

Performance measurement

Answer 1

involves the calculation of the return realized by a portfolio over a specific period, called the evaluation period

Question 2

performance appraisal

Answer 2

an assessment of how well a portfolio has done over the evaluation period

Question 3

rule 200 sets out the following requirements

Answer 3

• Statements must be sent to clients monthly, when a transaction has occurred, or when the investment dealer has modified the balance of securities or cash in the client’s account
• Statements must be sent quarterly for all customers having any debit or credit balance or securities held at the end of the quarter

Question 4

dollar weighted average

Answer 4

o measures the performance based on amount and timing of cash flows
o IIROCs preferred method

Question 5

time weighted average

Answer 5

the time-weighted return eliminates the effect of portfolio cash flows; it measures only the cumulative performance of the portfolio’s investments

Question 6

Closet indexing

Answer 6

benchmark’s industry, economic sector, or even individual security weights are duplicated fairly closely to avoid straying too far from the benchmark to avoid underperforming

Question 7

Comparison Universe

Answer 7

The collection of portfolios that form the basis for comparison when you compare a portfolio’s return with the performance of a large number of other portfolios with similar risk characteristics

Question 8

Survivorship bias

Answer 8

As defunct portfolios drop out, they have to be excluded from rankings in subsequent quarters. Therefore, a comparison universe is always a universe of survivors

Question 9

Jensen’s Alpha

Answer 9

Jp = Rp - Rf - (Bp X (Rm - Rf))

Where Rp = average return on portfolio
Rf = risk free rate
Rm = average return on market index
Bp = portfolio beta

If Jensen’s alpha is positive, the manager has produced more return than predicted by the portfolio’s beta and has therefore added value to the portfolio (0 = normal performance)

Question 10

Sharpe Ratio

Answer 10

Sp = Rp - Rf / standard deviation of portfolio

A positive Sharpe ratio indicates that the product’s average return was greater than the risk-free return; a negative ratio indicates its average return was less than the risk-free return

Question 11

Treynor Ratio

Answer 11

Tp = Rp - Rf / Bp

The higher the Treynor ratio, the better the portfolio manager’s performance