Learning Outcome 9 - 10 multiple response questions / Analyse the performance of investments

Question 1

When is the investment policy statement formulated?

Answer 1

When the new client is taken on

Question 2

Why should pension funds have high exposure to real assets such as equities and property?

Answer 2

To keep up with inflation

Question 3

What is the taxation treatment on pension funds as far as corporation tax goes?

Answer 3

They are exempt

Question 4

How often should portfolio reporting to investors be carried out?

Answer 4

At least 6 months

Question 5

How often would a summary portfolio valuation normally be issued?

Answer 5

Quarterly

Question 6

UK equities have outperformed which 2 other asset classes over the long term?

Answer 6

UK deposits and fixed-interest securities

Question 7

What does MWR measure?

Answer 7

Overall return of capital invested over a specified period

Question 8

What does TWR measure?

Answer 8

Performance of portfolios between different fund managers

Question 9

Why would MWR or TWR be used over a simple holding period return?

Answer 9

Because cash flows and returns over multiple periods need to be considered

Question 10

TWR can identify a portfolio’s overall return from several different sub-periods, true or false?

Answer 10

True

Question 11

TWR is determined by compounding the returns of what?

Answer 11

Sub-periods

Question 12

If analysing an individual portfolio, would MWR or TWR be best?

Answer 12

MWR

Question 13

TWR is not affected by timing of cash flows and different new money flows, true or false?

Answer 13

True

Question 14

Which ratio is used to measure the return of an investment by adjusting for its risk? (risk-adjusted returns)

Answer 14

Sharpe ratio

Question 15

Which 3 things would you need to know to calculate a Sharpe ratio?

Answer 15

Return on investment (%)
Risk-free return (%)
Standard deviation (%)

Question 16

What does a negative Sharpe ratio indicate?

Answer 16

The investment being analysed didn’t do as well as another risk-free asset

Question 17

What does Alpha indicate?

Answer 17

The difference between the return expected from a security (given its beta) and the return actually produced

Question 18

What does a positive Alpha indicate?

Answer 18

That the security has performed better than predicted, given its beta

Question 19

Which investment strategy can show an investment managers ability at stock-picking?

Answer 19

Alpha

Question 20

What 2 things does the information ratio measure?

Answer 20

Skill of fund manager
How often they beat the benchmark

Question 21

What does a positive information ratio indicate?

Answer 21

Manager added value based on risk taken

Question 22

How do equities tend to perform in times of slowing economic growth or rising interest rates?

Answer 22

Poorly

Question 23

Can the bank base rate be used as a benchmark?

Answer 23

Yes

Question 24

Benchmarks are used to evaluate the performance of an investment manager; true or false?

Answer 24

True

Question 25

Being underweight against the benchmark in a sector indicates underperformance; true or false?

Answer 25

False

Question 26

What is the holding period formula?

Answer 26

Income + end - start
divided by
start

Question 27

What is the MWR formula?

Answer 27

Income + end - start - new
divided by
start + (new x n /12 )

Question 28

What is the Alpha formula?

Answer 28

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.

Question 28

What is the Sharpe ratio formula?

Answer 28

Actual return - risk-free investment
divided by
standard deviation