Performance Eval

Question 1

Performance Evaluation

Answer 1

1. performance measurement - rate of return
2. performance attribution - sources of return
3. performance appraisal - luck vs skill

Question 2

TWRR

Answer 2

time weighted rate of return; geometric rate of return

not impacted by external cash flows

Question 3

Return CF at Beginning

Answer 3

Question 4

Return CF at End

Answer 4

Question 7

MWRR

Answer 7

money weighted rate of return

FV = PV( 1 + r )ⁿ + CF( 1 + r )ⁿ

impacted by CFs; used when manager controls timing of CFs

Question 8

Portfolio Return

Answer 8

P = Manager + Style + Active Return

Style (TAA, client) = Benchmark - Index Return

Act Return (manager) = Portfolio - Benchmark Return

Question 9

Benchmark Characteristics

Answer 9

1. specified in advance
2. appropriate
3. measurable
4. unambiguous
5. relective of manager’s style
6. accountable
7. investable

Question 10

Benchmark Types

Answer 10

1. absolute return
2. manager universe
3. market index
4. style index
5. factor-model-based
6. returns based
7. custom security-based

Question 11

Tests of Benchmark Quality

Answer 11

1. min systematic bias
2. low tracking error
3. high coverage ratio
4. low turnover
5. positive active positions
6. similar risk characteristics

Question 12

Micro Performance Attribution

Answer 12

1. pure sector allocation
2. within sector selection
3. allocation/ selection interaction

Question 13

Pure Sector Allocation

Answer 13

over/under weight sectors

Σ (w_p - w_b) (r_b - r_{overall benchmark})

Question 14

Within Sector Selection

Answer 14

security selection

Σ w_b (r_p - r_b)

Question 15

Allocation/ Selection Interaction

Answer 15

Σ (w_p - w_b) (r_p - r_b)

Question 16

Macro Performance Attribution

Answer 16

1. policy allocations
2. benchmarks returns
3. fund returns, valuations, external CF

Question 17

Macro Attribution Analysis

Answer 17

break down portfolio return by

1. net contributions
2. r_f
3. asset categories (SAA)
4. benchmarks (TAA)
5. inv manager
6. allocation effects (error term)

Question 18

Fundamental Factor Model

Micro Attribution

Answer 18

1. identify factors
2. determine beginning exposure to factors (BM)
3. active exposure
4. active impact

Question 19

FI Attribution Analysis

Answer 19

1. int rate effect (BM return)
2. int rate management (duration, convexity, yeild curve)
3. sector/ quality management
4. security selection
5. traing effect (error)

Question 20

Alpha

Answer 20

risk adj return; systematic risk (β)

α = R_p - [r_f + β ( R_M - r_f )]

Question 21

Treynor Measure

Answer 21

return on risk; systematic risk (β)

T = ( R_p - r_f ) / β

Question 22

Sharpe Ratio

Answer 22

return on risk; total risk (SD)

SR = ( R_p - r_f ) / σ_p

Question 23

M²

Answer 23

return on risk; total risk (SD)

M² = r_f + [( R_p - r_f ) / σ_p] σ_m

Question 24

IR

Answer 24

information ratio

IR = active return/ active risk = ( R_p - R_b ) / ( σ_p - σ_b )