Trading, Performance Evaluation, and Manager Selection and Case Studies Flashcards
What is a type II error in manager selection?
Manager is fired when in fact the manager added value
What is a type II error in manager selection?
Manager is hired when in fact the manager added no value
What is the difference between the BHB and BF attribution models?
The BF model takes away the benchmark total level return from the benchmark sector return in the allocation calculation.
What is the issue with the BHB model that the BF model attempts to solve?
The BHB model issue is that allocation decisions that are overweight could still show a positive return even when wrong.
Is a type I or a type II error more easily measured?
Type I errors are more easily measured than Type II errors.
What is the difference between investment due diligence and operational due diligence?
Investment due diligence examines and evaluates the qualitative considerations that illustrate that the manager’s investment process is repeatable and consistently implemented.
Operational due diligence is concerned with the back office stuff, processes and governance of the firm.
When should you use a liability-based benchmark?
Liability-based benchmarks are used most frequently when assets are required to pay a specific future liability, as in a defined benefit pension plan.
How do you calculate the Treynor ratio and why is it useful?
(Portfolio return - RFR) / Beta
The usefulness of the Treynor ratio depends on whether systematic risk or total risk is most appropriate in evaluating performance. Because of its reliance on beta, the Treynor ratio shows how a fund has performed in relation not to its own volatility but to the volatility it would bring to a well-diversified portfolio.
How do you calculate the Sortino ratio?
(Expected return - min return) / downside standard deviation)
How do you calculate the information ratio?
Active return / active risk
Tracking error / standard deviation
How do you calculate the appraisal ratio?
Alpha from a factor model / Standard error of regression
How do you calculate arrival cost in basis points ?
((Average price - submit price)/submit price) x 10,000
How do you calculate VWAP in basis points ?
((Average price - VWAP)/VWAP) x 10,000
How do you calculate VWAP in basis points ?
((Average price - TWAP)/TWAP) x 10,000
How do you calculate market-adjusted cost in basis points ?
Index cost = (Index VWAP - Index arrival price) / Index arrival price x 10,000
Market-adjusted cost = Arrival cost - stock beta x index cost
