Final study Flashcards
what is the information ratio used for?
to assess risk adjusted performance of active portfolio managers
shows consistency with which a manager beats a benchmark index
what does a positive alpha indicate?
That the investment has performed better than predicted given its beta
How do you calculate sharpe ratio?
return - risk free return / standard deviation
what is time weighted rate of return?
a measure of compound rate of growth in a portfolio
breaks down returns into sub periods between additions and withdrawals of capital
return of each sub period is compounded to give overall time weighted return for the period
what is the sharpe ratio?
measures excess return for every unit of risk that is taken in order to achieve the return
risk is measured by the standard deviation of returns
formula is:
Return - risk free return / standard deviation
what is alpha?
quantifies the value added or taken away by the manager
it is the difference between return expected given its beta and the return actually produced
to work it out you do CAPM and deducted this figure from the expected return
what is the information ratio?
used to assess risk adjusted performance of active portfolio managers vs a benchmark
higher ratio the higher the added value
formula is:
return - benchmark return / tracking error
what is time weighted return used for?
comparative purposes because it is not affected by cash flows
what is synthetic replication?
- involves a swap which is an OTC derivative
- exchange returns on the index for a payment
- lower cost method but investor exposed to counterparty risk
which type of investment management combines both value and growth approaches?
blend investing
what is growth investing?
to be considered a growth stock, a company should have the following:
- positive growth rate in earnings per share in at least 4/5 years
- a low PE relative to growth rate
- optimistic chairman’s statement in report and accounts
- strong liquidity
- competitive advantage
Value tests:
1) Adequate size
2) Strong financial position
3) Earnings stability
4) Dividend record
5) Earnings growth
6) moderate price to earnings ratio
7) moderate ratio of price to assets
what is strategic asset allocation?
long term strategy
only adjusted in extreme conditions
or if client circumstances change
what is tactical asset allocation?
involves short term variation of asset allocation to take advantage of market changes or fluctuations
overrides mathematical models with judgement calls
used more by DFMs
what is stochastic modelling?
applies mathematical techniques to generate a probabilistic assessment of returns and volatility
specifies a number of factors - interest rates, inflation etc
results plotted showing most and least likely outcome
dependent on assumptions
