Performance Management (Ch13) Flashcards

1
Q

what is the purpose of performance measurement?

A
  • identify superior managers
  • compensate managers
  • understand sources of return
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2
Q

what is the formula for the sharpe ratio?

A

= ( RP - Rf )/stdv of portfolio

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3
Q

what does the sharpe ratio tell us?

A
  • optimising investment (highest abnormal returns for lowest SD, compare to benchmark)
  • the higher the better
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4
Q

what is the formula for the treynor ratio?

A

( RP - R of BM)/Beta

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5
Q

what does the treynor ratio tell us?

A
  • best performing fund (differences due to level
    of diversification and systematic risk)
  • the higher the better

Used primarily in identifying portfolios with similar levels of systematic risk- exposure to a particular market/ market risk

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6
Q

what is the formula for Jensen’s alpha?

A

α = RP- [Rf + beta (RM–Rf)]

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7
Q

what does Jensen’s alpha tell us?

A

-tells us the level of abnormal returns
-higher is better
Used primarily in identifying portfolios with similar levels of systematic risk.

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8
Q

what is the formula for Tracking error?

A

TE= difference in standard deviation x sqrt (payment periods in a year)

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9
Q

what does Tracking error tell us?

A
  • active risk, extra risk taken to generate abnormal returns

- higher is not always better, (could be negative returns)

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10
Q

what is the formula for the information ratio?

A

=(RP - Rf)/Tracking Error
= Active Return/Active Risk
= α / σε

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11
Q

what does the information ratio tell us?

A
  • exposure to abnormal returns, if same TE but higher info ratio, this means they have higher abnormal returns
  • The higher the better
  • A ratio of 0.5 is considered good performance.
  • Presumes that Tracking Error is the key risk
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12
Q

which performance measurement requires a two tailed test to test significance?

A

Jensen’s alpha

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13
Q

how is the t-stat calculated?

significant at 5% value?

A

= α - Ho/SE(α)

= -1.96 or 1.96 or both

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14
Q

What is the allocation affect? which skills does this reflect?

A

understanding the correct weights to use for a particular market segment
- market timing skills

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15
Q

What is the selection effect? which skills does this reflect?

A

understanding if the correct choice of assets was made within each market segment
- Security selection skills

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16
Q

How is allocation effect calculated?

A

Sum of all (asset delta weights (Portfolio-BM)) x (R of BM for asset)

17
Q

How is selection effect calculated?

A

Sum of all ((R Portfolio- R BM) x W of portfolio)

18
Q

whats another way ( RP - Rf) may be shown?

A

mean (mu)