S17 Flashcards
performance evaluation components
measurement
attribution
appraisal
money weighted rate of return
NPV
time weighted rate of return
(1+T1)(1+T2) ….
when TWRR is preferred
when manager doesn’t control the CF
3 components of portfolio return
M market index return
+
S style contribution (Normal return - Market return)
+
A active return (Portfolio - benchmark return)
7 benchmark properties
SAMURAI
- specified in advance
- appropriate
- measurable
- unambiguous
- reflective of manager’s current investment -opinions
- accountable
- investable
types of benchmarks
absolute manager universes broad market indices style indices factor based return based custom security based
where macro and where micro performance attribution is used
macro - at the fund sponsor level
micro - at the investment manager level
3 inputs in the macro performrance attribution
policy allocations
benchmark portfolio return
fund returns, valuation and external CF
6 levels of macro attribution analysis
net contributions
rfr
asset categories (according to strategic allocation)
benchmarks (according to tactical allocation)
investment managers
allocation effects (residual value close to zero)
micro performance attribution
pure sector allocation = (Wp-Wb)*(Rb - R)
+
allocation/selection interaction = (Wp-Wb)*(Rp-Rb)
+
withing sector selection = Wb*(Rr-Rb)
fixed income performance attribution analysis
Interest rate effect - expected - unexpected Interest rate management effect - duration - convexity - yield curve change Other managment effects - sector - bond selection - transaction costs Trading activity return (residual)
alpha =
= actual return - expected return
expected return (SML CAPM) =
= Rfr + beta (Rmarket - RFR)
treynor =
( Ractual - Rfr ) / beta
M2 measure (modigliani and modigliani) =
Rfr + Sharpe x StandDev Market
information ratio =
Active return / active risk = (Ra - Rb) / StandDev (A-B)
treynor vs sortino
treynor is sharpe with beta
sortino is sharpe with downside deviation and MARet
type 1 error
keeping bad managers
type 2 error
firing good manager
original dietz method for TWRR
=( (MV1-MV0) - CF ) / (MV0 + 0.5CF)
Modified dietz method for TWRR
=( (MV1-MV0) - CF ) / (MV0 + Timeweighted CF)
benchmark coverage ratio
how closely portfolio covers the securities from the benchmark
A quality control chart combines the
average value added and its standard deviation to generate a confidence interval that can be used to determine statistical significance.
global return components
benchmark domestic return = WbRbd
+
market allocation contribution = (Wp-Wb)Rbl
+
currency allocation contribution = (WpCp-WbCb), Where C is currency change impact
+
security selection contribution = Wp(Rpl-Rbl)
+
yield component = WpIL
2 period active return =
= Ra1(1+Rb2) + Ra2(1+Rp1)
security allocation effect (global investing) =
= Wp * ( Rp-Rb)
tracking error or relative risk =
SqRoot ( sum (surplus return - average surplus return) / (n-1) )
what performance ratios use total risk ?
sharpe and M2
what performance ratios use systematic risk?
treynor and expost alpha (using beta in formulas)
if fund is well diversified, what performance adjusted ratios to use to evaluate a new investment ?
those using systematic risk (beta)
when question is about strength or weaknesses of a manager, pay MASSIVE attention to
“relative to” what are strengths measured (index, etc)
why decomposing risks is complicated?
risks in global portfolio are correlated
3 potential biases in performance analysis
survivorship
assumption of normal distribution of returns
infrequent pricing
