Topic Quiz 11 Flashcards
Your portfolio only contains risk free assets and you would like to add risky assets. What performance measure should you use when choosing the best risky assets to include?
The Sharpe ratio should be used as you would want to add the risky assets that have the lowest total risk.
How can the returns on an investment fund be used to identify the investment style of the investment fund?
The investment fund’s returns are regressed on the returns on market indices for each of the asset classes in the fund.
If the investment fund is maintaining the investment style as stated in the fund’s product disclosure statement, then the regression coefficient for each market index would be non zero.
When would you use the information ratio to measure the performance of a portfolio?
When an investment or manager wants to add an actively managed portfolio to a passive portfolio and they want to see the amount of non-systematic (residual) risk added to the total portfolio.
How can you use an alpha capture trading strategy to create an equity portfolio that has no systematic risk?
Using the alpha capture trading strategy, you can construct a portfolio with positive alpha and zero beta (portfolios with low/zero correlation with the market) by hedging away systematic risk. For example you could remove stock market risk by selling stock index futures.
Suggested answer:
By buying shares in companies you feel are undervalued, so have a positive alpha, and remove the systematic risk by selling enough equity index futures so that the portfolio has a zero beta.
How can the Treynor ratio show whether or not a company is overvalued?
The Treynor ratio for the market portfolio is the slope of the security market line (SML).
When a company’s shares are overvalued, its Treynor ratio will be less than the market’s Treynor ratio.
When a company’s shares are undervalued, its Treynor ratio will be more than the market’s Treynor ratio.
Do you only need to consider a portfolio’s return when measuring the performance of the portfolio?
No, you should consider the portfolio’s risk-adjusted return as riskier investments are expected to earn a higher return.
An investment fund has a higher return than the benchmark portfolio. How can the contribution of asset allocation to the superior performance of the investment fund be measured?
It will be the difference between the return generated by the asset allocation of the investment fund relative to the return generated by the neutral allocation in the benchmark portfolio.
Why would you want the benchmark portfolio to have a neutral allocation across asset classes?
The neutral weights on each asset class reflect the risk tolerance of an investor in a passive benchmark portfolio.
This allows the return on a portfolio to be compared to the return on a passive benchmark portfolio.
What is a weakness of measuring the performance of equity portfolios in a comparison universe using percentile rankings?
Some portfolios might only invest in sub-groups of the equity universe, such as high-beta shares or growth shares. The rankings do not take this into account.
Analysts working for an investment fund predict that returns on shares in growth companies will be lower than the returns on shares in value companies. What active strategy should the investment fund adopt?
Factor tilting where they temporarily increase the weight on value companies and decrease the weight on growth companies in the portfolio.
