Evaluating Portfolio Performance

Question 1

___ is great for measuring the Rate of Return to the portfolio owner.

Answer 1

Dollar Weighted Return
aka
Internal Rate of Return

Question 2

What are some of the most common portfolio benchmarks?

Answer 2

-S&P 500
-Dow Jones Industrial Avg
-Russell 2000
-10 year US Treasury Bong
-Barclays Capital US Aggregate Bond Index

Question 3

Why is the Dollar-weighted return (aka internal rate of return) not a good measure of a portfolio manager’s performance?

Not a good measure for comparison against an index?

Answer 3

DWR/IRR is heavily influenced by cash flows

• Portfolios can’t control timing of cash flows
• Indices have no cash flows

Question 4

In solving for the Dollar Weighted Return, we classify various investments into 3 types of structures:

Answer 4

1. Capital Appreciation (or Depreciation) - one large sum at beginning
2. Equal Periodic Payments
3. Unequal Periodic Payments

Question 5

To measure the performance of the portfolio manager ___ return is the best method.

Answer 5

Time-weighted return (AKA Geometric Mean Return)

Question 6

What is the Sharpe Ratio Formula and what does it do?

Answer 6

Sharpe Ratio = (Avg total return -Avg risk free rate) ÷ Standard Deviation

SR measures the excess return of the portfolio per unit of total risk

Question 7

How do you know if a Sharpe Ratio is good or not?

Answer 7

The higher the ratio the better the portfolio performance

Question 8

What is the Information Ratio for?

Answer 8

It compares the annualized returns of a fund with those of a selected benchmark (eg index)

Question 9

How do you know you have a good Information Rate?

Answer 9

The higher the better

Question 10

What is the difference between the Treynor Performance Index and the Sharpe Ratio?

Answer 10

TPI uses Beta
SR uses Standard Deviation

Question 11

True or False

Since the Treynor Performance Index uses Beta that means, unlike the Sharpe Ratio, it only measures nonsystematic risk

Answer 11

False; TPI measures excess return per unit of market/systematic risk

Question 12

What is the Sharpe Ratio Formula?

Answer 12

Sharpe Ratio = (rₚ - r_f) ÷ σₚ

(Avg total return -Avg risk free rate) ÷ Standard Deviation

Question 13

What is the Treynor Performance Index Formula?

Answer 13

TPI = (rₚ - r_f) ÷ βₚ

(Avg total return -Avg risk free rate) ÷ Beta

Question 14

What is Jensen’s Alpha used for?

Answer 14

It determines whether a money manager contributed excess return using the Capital Asset Pricing Model

Question 15

What is the Jensen’s Alpha Formula?

Answer 15

αₚ = rₚ - [r_f + (rₘ - r_f)βₚ]

αₚ = portfolio alpha
rₚ = avg portfolio return
r_f = avg risk free rate
βₚ = portfolio beta
rₘ = avg market return

Question 16

In the context of portfolios, what does turnover mean? What are its implications?

Answer 16

Turnover refers to changing of assets within a portfolio

Higher turnover can mean more taxes

Question 17

Describe how ETFs and Mutual Funds are affected by turnover ratios

Answer 17

Higher turnover ratios are a sign of more active trading in a fund.

Therefore, mutual funds have higher turnover ratios and thus higher management fees.

ETFs have lower turnover ratios and lower fees (lower taxes)

Question 18

A stock split ___ a stock’s price.

A reverse split ___ a stock’s price.

Answer 18

Lowers

Raises

Question 19

True or False

Wash Sales Rules disallow loss deductions for disposition of securities if, within a period of 60 days before and 60 days after the trade, the tapayer purchases the same or a substantially identical security

Answer 19

False; the time period is 30 days before / 30 days after, not 60