Performance of Investments Flashcards
1
Q
Explain + Equation for Holding Period Return
A
- return earnt over time investment held as % of original cost.
- R = D+V1-V0 / V0
D = Income received
V1 = value of portfolio @ end
V0 = Value of portfolio at start
2
Q
Explain + Equation for Relative Return
A
- Return measured against return from benchmark
Rrel = R - Rb
R = Return on portfolio
Rb = Return on benchmark
3
Q
Explain and Equation for Money Weighted Rate of Return
A
- return over a year adjusting for cashflows
- MWR = D+V1-V0-C / V0+(Cxn/12)
C = new money introduced in the year
n = number months remaining in year
4
Q
Explain + Equation for Time Weighted Rate of Return
A
- breaks down the return for particular periods between additions and withdrawals then compounds the returns
- 1+R = (1+r1)(1+r2)(1+r3)…
5
Q
Explain and equation for Sharpe Ratio
A
- Used to measure return adjusting for risk
- Return on inv. - Risk-Free Rate / std. Dev of return on inv.
6
Q
Explain and equation for alpha
A
- Difference between the return you would
expect from a security, given its beta, and the return that it has actually produced. - ‘Value Added’ by fund manager
- a = Actual return - [Rf+Bi(Rm-Rf)]
Rf = risk free rate of return
Bi = Beta of inv.
Rm = Market Return
7
Q
Explain and Equation for Information Ratio
A
- used to assess the risk-adjusted performance of active portfolio managers
- Rp-Rb / Tracking error
8
Q
What are the 4 areas of performance attribution?
A
- Asset Allocation
- Stock Selection
- Timing of the Market
- Risk
9
Q
How do you evaluate performance in relation to performance attribution?
A
- Select appropriate benchmark
- Find Asset Allocation of benchmark
- Calculate benchmark returns
- Compare with portfolio returns in terms of asset allocation - MGR asset allocation % x return on index by asset class = % of total returns
- Compare the above figure to MGRs actual performance
