Investment Performance Measurement Flashcards
In the context of decomposing returns for bonds, what is the income effect?
The return an investor would receive if the yield curve was unchanged.
In the context of decomposing returns for bonds, what is the interest-rate effect?
The return an investor would receive if the Treasury yield curve shifts.
In the context of decomposing returns for bonds, what is the sector/quality effect?
The changing yield as sector yields/credit quality changes.
What does the Sharpe Ratio measure?
The excess return of a portfolio over the risk-free rate, adjusted by total risk of portfolio (σ):
Rp-Rf / σ
When is the Sharpe measure appropriate to use?
For un-diversified investors. It can be improved by better stock selection and greater diversification.
What does the Treynor Ratio measure?
The excess return of a portfolio over the risk-free rate, adjusted by systematic risk of a portfolio (β).
Rp-Rf / β
When is the Treynor measure appropriate to use?
For diversified investors. It can be improved by better stock selection.
What does the Jensen measure do?
Measures the excess return of a portfolio over the CAPM expected return (‘the abnormal return’).
A stock-picker looks for a positive α.
What does the information ratio compare?
Compares the excess return of the portfolio against the volatility of the excess return.
Rp-Rb / σsurplus (σp-σb over time)
What does the excess return to relative duration measure?
The excess return of a bond portfolio over the risk-free rate, adjusted by the relative duration of the portfolio.
Rp-Rf / (Dp/Dm)
How do you work out the market timing (asset allocation) portfolio gain?
Actual weighting x Benchmark return
How do you work out the stock selected portfolio gain?
Benchmark weighting x Actual return
