Investment Performance Measurement Flashcards
What are the two components of total return?
Income element and the changes in capital value.
How is income into a fund treated?
Normally assumed to be reinvested to enhance capital gain.
Why is the accurate measurement of the return on the fund difficult?
Because money is withdrawn and added to managed funds.
What is the money weighted rate of return?
Equivalent to calculating internal rate of return, can be influenced by size & timing of fund flows
How does time weighted rate of return treat each return?
Gives equal weight to each return achieved in each portion of the particular measurement period of interest
What returns are fund managers interested in?
Absolute return, how it relates to return achieved by other fund managers, return from the market as a whole or the return for a particular sector of the market.
What are the different type of benchmarks?
Broad market indices, style, absolute, peer group and customised.
What should a good benchmark portfolio represent?
Feasible alternative to managers own portfolio.
What does the Sharpe measure do?
Uses an estimate of the total risk of a portfolio to calculate excess returns to volatility, being the standard deviation of returns
What is the Treynor method?
Based on capital asset pricing model ( CAPM) beta coefficient of a portfolio and measures excess return with respect to its beta. Takes into account only systematic risk whereas Sharpe measure considers total risk.
What does the information ratio do?
Compares performance of a fund relative to the risk taken to achieve that performance the return measured is the excess return over and above an appropriate benchmark, rather than the risk free rate as used with other methods.
