Measuring Portfolio Performance

Question 1

Holding period return

Answer 1

The return made over the time the investment is held

Expressed as a percentage of the cost

Does not take into account tax or
timing of receipts.

D+ VI - Vo/ Vo = R

R = the holding period return
D = income received
Vo= value at the beginning
VI= value at the end
Relative Return

Question 2

Money-Weighted Rate of Return

Answer 2

Modified form of holding period return

Adjusted for cash inflows

Calculation allows for differences in timing, weighting each by number of months remaining at
time of investment or withdrawal

The difference in value of a portfolio at the end of the period

Used to calculate valid rate of return for portfolio

Compared with the value at the start of the period (plus income/capital distributed):
D+ VI- Vo-C/
Vo+(Cxn/12)
n = number of months remaining in the year
c= new money introduced in the year

Question 3

Time-Weighted Rate of Return

Answer 3

Attempts to eliminate distortions caused by timings of new money

By breaking down return into sub-periods:

TWR = 
R= 
V1
---
V0  x 
V2
---
(V1 + C) - 1

Universally used for comparative purposes because not affected by cash flows

Question 4

Sharpe ratio

Answer 4

Return on investment - risk free return / standard deviation of the return

Question 5

Alpha

Answer 5

Actual return - (rf + b(rm-rf)

Question 6

Information ratio

Answer 6

Rp-rb/tracking error

Question 7

Sharpe ratio explained

Answer 7

Measures excess return for
every unit of risk that is
taken in order to achieve
the return

Risk measured by standard
deviation of returns

Question 8

Alpha explained

Answer 8

Difference between return
expected, given its beta, and the
return actually produced

Quantifies the value added’ or
taken away by the manager

Question 9

Information ratio explained

Answer 9

Used to assess risk-
adjusted performance of
active portfolio managers
vs a benchmark

Higher ratio = higher added
value

Question 10

Accumulating regular savings formula

Answer 10

FV =
P(1+r)n-1
(—————)
R

Question 11

Discounting of regular savings formula

Answer 11

A =

P 1-(1+r)-n
—————
R