Learning Outcome 9 - 10 multiple response questions / Analyse the performance of investments Flashcards
When is the investment policy statement formulated?
When the new client is taken on
Why should pension funds have high exposure to real assets such as equities and property?
To keep up with inflation
What is the taxation treatment on pension funds as far as corporation tax goes?
They are exempt
How often should portfolio reporting to investors be carried out?
At least 6 months
How often would a summary portfolio valuation normally be issued?
Quarterly
UK equities have outperformed which 2 other asset classes over the long term?
UK deposits and fixed-interest securities
What does MWR measure?
Overall return of capital invested over a specified period
What does TWR measure?
Performance of portfolios between different fund managers
Why would MWR or TWR be used over a simple holding period return?
Because cash flows and returns over multiple periods need to be considered
TWR can identify a portfolio’s overall return from several different sub-periods, true or false?
True
TWR is determined by compounding the returns of what?
Sub-periods
If analysing an individual portfolio, would MWR or TWR be best?
MWR
TWR is not affected by timing of cash flows and different new money flows, true or false?
True
Which ratio is used to measure the return of an investment by adjusting for its risk? (risk-adjusted returns)
Sharpe ratio
Which 3 things would you need to know to calculate a Sharpe ratio?
Return on investment (%)
Risk-free return (%)
Standard deviation (%)
What does a negative Sharpe ratio indicate?
The investment being analysed didn’t do as well as another risk-free asset
What does Alpha indicate?
The difference between the return expected from a security (given its beta) and the return actually produced
What does a positive Alpha indicate?
That the security has performed better than predicted, given its beta
Which investment strategy can show an investment managers ability at stock-picking?
Alpha
What 2 things does the information ratio measure?
Skill of fund manager
How often they beat the benchmark
What does a positive information ratio indicate?
Manager added value based on risk taken
How do equities tend to perform in times of slowing economic growth or rising interest rates?
Poorly
Can the bank base rate be used as a benchmark?
Yes
Benchmarks are used to evaluate the performance of an investment manager; true or false?
True
Being underweight against the benchmark in a sector indicates underperformance; true or false?
False
What is the holding period formula?
Income + end - start
divided by
start
What is the MWR formula?
Income + end - start - new
divided by
start + (new x n /12 )
What is the Alpha formula?
Actual - [Rf + ßi (Rm – Rf)]
Note: this is an extension of the CAPM formula, it simply has actual at the start minus CAPM. Add extra brackets.
What is the Sharpe ratio formula?
Actual return - risk-free investment
divided by
standard deviation
