Performance Management (Ch13)

Question 1

what is the purpose of performance measurement?

Answer 1

• identify superior managers
• compensate managers
• understand sources of return

Question 2

what is the formula for the sharpe ratio?

Answer 2

= ( RP - Rf )/stdv of portfolio

Question 3

what does the sharpe ratio tell us?

Answer 3

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

Question 4

what is the formula for the treynor ratio?

Answer 4

( RP - R of BM)/Beta

Question 5

what does the treynor ratio tell us?

Answer 5

• 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

Question 6

what is the formula for Jensen’s alpha?

Answer 6

α = RP- [Rf + beta (RM–Rf)]

Question 7

what does Jensen’s alpha tell us?

Answer 7

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

Question 8

what is the formula for Tracking error?

Answer 8

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

Question 9

what does Tracking error tell us?

Answer 9

• active risk, extra risk taken to generate abnormal returns

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

Question 10

what is the formula for the information ratio?

Answer 10

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

Question 11

what does the information ratio tell us?

Answer 11

• 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

Question 12

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

Answer 12

Jensen’s alpha

Question 13

how is the t-stat calculated?

significant at 5% value?

Answer 13

= α - Ho/SE(α)

= -1.96 or 1.96 or both

Question 14

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

Answer 14

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

Question 15

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

Answer 15

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

Question 16

How is allocation effect calculated?

Answer 16

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

Question 17

How is selection effect calculated?

Answer 17

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

Question 18

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

Answer 18

mean (mu)