Investment Performance

Question 1

What has been the order for best past performance of asset classes

Answer 1

Equities
Bonds
Cash

Question 2

What is past performance best used for?

Answer 2

Looking at performance in the long term.

Question 3

What is the important thing to consider when utilising past performance?

Answer 3

How likely will the circumstances that led to good performance be repeated.

Question 4

What is the holding period return used for?

Answer 4

Looks at the value of the fund at the end of a period and any money paid out between the start and end of the period as a percentage of the value at the start.

Question 5

What is the money weighted rate of return used for?

Answer 5

Gives the rate of return over a period, including money in and money out.

A way to calculate the return for a portfolio and a comparison and insight into the rate of return needed if they were to place the initial value into a deposit account for the year.

Question 6

What is the money weighted return not used for?

Answer 6

Comparing different portfolios and fund managers.

This is due to withdrawals being down to the investor, not the fund manager.

Question 7

What is the Sharpe ratio used for?

Answer 7

Measuring the return over the risk free return

Question 8

What does a higher Sharpe ratio mean?

Answer 8

The better the portfolio manger has performed.

Question 9

What is the information ratio?

Answer 9

A general form of the Sharpe ratio that looks at consistency of performance against a benchmark. (Tracking error)

Shows the effect of fund management over passive funds.

High score means active management is adding value.

Question 10

What is the alpha?

Answer 10

The difference between the expected return based on an investment beta and the actual return achieved.

Question 11

What is the alpha used for?

Answer 11

Seeing how successful a fund manager has been in picking stocks and can even be used for funds of funds because the fund manager may have added value in other ways.

Question 12

What is benchmarking?

Answer 12

Comparing the performance of a fund manager against an appropriate indecie for the sector.

Question 13

What are the problems with bench marking?

Answer 13

Many indices only reflect movement in capital values

Their is no accounting for any cash balances

Weighting by market cap can cause distortions

Question 14

What should be considered when selecting a fund manager?

Answer 14

Experience
The structure and style of investment (paramount factor)
Size of the fund (larger less risk-smaller better returns)
Staff turn over
Charges
Past performance

Question 15

What must an authorised organisation agree with?

Answer 15

The clients’ objectives for investment
(Capital growth, income priority.
Also, they should provide level of risk to give parameters to work within.

Question 16

What should be regularly taken into account from the investor policy statement?

Answer 16

Changes in taxation
Changes in regulation
Changes in the market
Where drawn up at client level, client circumstance

Question 17

What regualr reports should a client receive?

Answer 17

Portfolio valuation
Details of holdings
Relevant commentary on the market and funds
Performance against the benchmark
Any recommended changes in strategy

Question 18

What is one of the most important changes required at review?

Answer 18

Rebalancing the portfolio as one asset class may outperform over a while. Therefore, may require sale to buy into others

Question 19

What is the time weight rate of return?

Answer 19

Measure of performance that breaks down the returns into discreet periods.

Question 20

What is the time weighted rate of return used for?

Answer 20

Comparing portfolios and fund managers as it is not affected by the timing of new money and withdrawals.

Question 21

What is the time weighted rate of return used for?

Answer 21

Comparing portfolios and fund managers as it is not affected by the timing of new money and withdrawals.