Performance Measurement and Attribution Flashcards
Holding period return calculation
Ending Price - Beginning Price + Dividend during period one / Beginning Price
Effective Annual Rates
percentage of change of an amount invested after factoring in compounding and assuming the investment was made over a one year period
EAR is useful for
comparing investments because it provides a standard return parameter for a standard time period (one year)
An investment earns 8% per year compounded quarterly for six months. What is the EAR?
8.24%
APR often used for
periods less than one year and which reflects a simple interest rate applied over the whole year
EAR reflects what
would be actually experienced over a period of one year by factoring in compounding
Time weighted returns
managers return
Does not consider cash flows
Dollar weighted return
Investors return
Considers cash flows
IRR
Arithmetic returns
ignores compounding
Always equal or greater in value than geometric returns
Sharpe ratio formula
average annual return - average risk free return / standard deviation of the portfolio
M squared ratio
risk adjusted performance that adjusts for total risk using standard deviation
Omega description
a measure of the change in an options value based on the change in the underlying price of the asset
Tracking error is sometimes referred to as
Active risk
Active return
Extra return
annualized standard deviations of returns
residual standard deviation
Tracking error is also used in
Information ratio
Calculation of Tracking error
Portfolio return - benchmark return
Consider the following:
Portfolio A: 3.6, 7.5, 6.3, 4.5, 5.4
Portfolio B: 3.8, 7.0,6.9, 4.2, 5.0
Index: 4.6, 6.9, 7.4, 4.6, 5.2
Which portolio has the least tracking error to the index?
B
Information ratio
equals the average excess portfolio return above a benchmark, divided by the risk measured by SDEV
managers ability to select securities relative to a benchmark
captures the size of excess return and the ability to do so consistently
excess return/sdev
Portfolio return - benchmark return/tracking error
(Information Ratio) The contribution of the active portfolio depends on
the ratio of its alpha to its residual standard deviation
Information ratio meaures
the extra return we can obtain from security analysis
Active asset allocation considers
market timing or tactical allocations
Active asset selection considers
security selection or stock picking
Tracking error computed as
the standard deviation of the difference between to variables
Upside Capture Ratio are calculated by
Take the investment monthly report during months when the benchmark had a positive return and divide it by the benchmark return during that same month.
Survivorship bias mean
worse performing funds are removed from the database and the entire group aggregate return is higher as a result
