Module 11

Question 1

Holding Period

Answer 1

Simple yet important measure used to calculate the return on an investment over the period of time it is held

R = D+ V1 - V0 / V0

Question 2

Money Weighted Rate of Return

Answer 2

Measures overall return on capital invested over a specified period
Adjusts for Cash flows

New funds are invested or withdrawn during the year, calculation is modified to allow for differences in the timing

If income is received and invested straight away, it can be ignored

Initial portfolio, plus net new money, must earn in a deposit account to equal the portfolio actual value at the year end

Drawbacks
- Not appropriate when comparing different portfolios

Question 3

Time Weighted Rate of Return

Answer 3

TWR Attempts to eliminate the distortions caused by the timing of new money by breaking down the return for a particular period into sub periods between each addition or withdrawal of capital

Question 4

Measure risk adjusted returns

Answer 4

Sharp Ratio

• Higher the Sharpe ratio the better the return on an investment
• Negative ratio indicates risk free asset would have performed better than the investment being analysed

Alpha
- Value added by manager

Information ratio

• Consistency which a manager beats a benchmark index
• The higher the value, the higher the value added by the manager by active management

Question 5

Performance Attribution

Answer 5

Achieve results from the following:

• Asset allocation
• Stock selection
• Market timing
• Risk