Lecture 13 Flashcards
What are two ways of measuring returns over a multiperiod horizon?
Dollar-weighted returns are returns averaged across years, but with the years in which more money is invested weighting more.
Time-weighted returns are returns that are averaged across years, but that do not account for differences in the size of the investment.
How to calculate the time-weighted returns?
( (1 + R1)*(1 + R2) ) tot de macht 0.5!!!
What is peer-benchmarking and how to calculate the peer-adjusted return?
The return of the fund, net of the average returns of similar funds in the same period.
Peer-adjusted return = Realized fund return - Average return of peers
What is index-benchmarking and how to calculate the benchmark-adjusted return?
The return of the fund, net of the return of a reference index (such as S&P500, Russell 2000) in the same period.
Benchmark-adjusted return = Realized fund return - Return of reference index
When is a fund deemed successful according to peer- and benchmark-adjusted returns?
A fund is deemed successful when they have positive/high adjusted returns. That is because a fund is paid for beating the benchmark and not following the benchmark.
What are 6 risk-adjusted ways to measure fund performance?
Sharpe ratio
M2 Metric
Treynor ratio
T2 Metric
Information ratio
Portfolio Alpha
How to calculate the Sharpe ratio and for which investors is it the right measure? What is an advantage and a disadvantage?
S = Risk Premium / Volatility
A good measure for heavily undiversified investors because volatility also takes idiosyncratic risk into account.
A: It is simple and mean-variance optimizers will always choose the highest sharpe ratio.
DA: Uses total volatility while idiosyncratic risk can be diversified away.
What is the M2 Ratio and how to calculate it?
The M2 Metric compares fund performance relative to the market, after accounting for differences in the volatility of the two portfolios.
Create a new portpolio P* that has the same variance as the market variance and compare the returns.
What is the Treynor measure and how to calculate it? What is its advantage?
The treynor measure is a ratio of risk premium over beta instead of volatility.
Formula = Risk Premium / Beta.
If you ar an investor that is diversified you should use the Treynor measure instead of the Sharpe ratio.
What is the T2 metric and how to calculate it?
The T2 metric compares fund performance relative to the market, after accounting for differences in the beta of the two portfolios.
Create a new portfolio P* that has the same beta as the market beta and compare the returns.
What is Jensen’s Alpha and how to calculate it?
Jensen’s Alpha is the average return of a portfolio above the predicted return by CAPM. Under CAPM, it would be zero but in real life it isn’t.
Jensen’s Alpha = Fund Return - (Rf + Beta (Market premium))
What is the information ratio and how to calculate it?
Information ratio = Alpha / Tracking error
Alpha is divided by idiosyncratic risk. It measures the abnormal return per unit of risk that in principle could be diversified away by holding a market index portfolio.
What kind of investor would look at the information ratio?
An investor that wants to undiversify by betting on alpha. The benefit from this is alpha and the cost is idiosyncratic risk.
How can we use Sharpe to test if a manager is stock-picking?
The Sharpe regression gives a goodness-of-fit R2. When it is high, a lot of fund performance is explained by the asset allocation which means it follows the strategies. When it is low, the manager is stock-picking.
What is stock-picking?
Form of active management where manager selects undervalued stocks and speculates on an increase in price.
