Chapter 9 Flashcards
What is performance measurement?
The calculation of the investment return over a stated period.
It is about calculation what return an investment has achieved over x period.
What is performance evaluation and attribution?
Has the fund manager added value by meeting or outperforming a suitable benchmark. How have they achieved their return.
Evaluation looks at comparisons an attribution is about how it achieved that return.
What are the 2 most common ways of measuring a portfolio?
Money weighted return
- measures the overall return on capital invested over a specific period
Time weighted return
- allows comparisons to be made between the performances of different fund managers
What is the formula for money weighted return?
R = (D + V1 - V0) / V0
Rate of return = (income distributed + value at the end - value at the start) / value at the start
What is the formula for money weighted return when money is added?
MWR = (D + V1 - V0 - C) / V0 - (C x n/12)
Money weighted return = (income paid out + value at the end - value at the start - cash) / value at the start - (cash x time remaining / 12)
What is the formula for money weighted return when money is withdrawn?
MWR = (D + V1 - V0 + C) / V0 - (C x n/12)
Money weighted return = (income paid out + value at the end - value at the start + cash) / value at the start - (cash x time remaining / 12)
What is money weighted return without any cash added?
The holding period return.
What is the formula for time weighted return?
TWR = R = [(V1 / V0) x (V2 / V1 + C) - 1] x 100
Time weighted return = rate = [(value at end / value at start) x (value at end of final period / value at end + cash) -1] x 100
What is systematic or market risk measured by?
Beta
What is volatility of returns measured by?
Standard deviation.
What is information ratio?
Evaluated the portfolios performance relative to the performance of a benchmark.
Measuring risk adjusted returns.
Often used to compare the fund against a tracker fund.
Can be misleading if returns are not normally distributed.
What is sharpe ratio?
Also a measure of risk adjusted returns.
Compares active funds against each other.
Only useful when comparing funds with similar objectives.
What is alpha?
Measures the stock picking skills of a fund manager.
Only useful where the fund is similar to the benchmark.
A positive alpha indicates good stock selection.
How do you calculate sharpe ratio?
(Return on the investment - risk free return) / standard deviation
The greater a portfolios sharpe ratio, the better it’s risk adjusted performance has been. High is better.
How do you calculate alpha?
Alpha = actual portfolio return - [risk free + beta x (market premium - risk free)]
A positive alpha is good. Is shows that even when adjusted for risks taken, the investment outperformed what was expected of it given its beta.
