Analysing investment performance

Question 1

What are the main differences between time-weighted rate of return and money-weighted rate of return?

Answer 1

MWRoR good for overall return and relatively simple.

TWRoR good for comparisons but can be complicated.

Question 2

What does the Sharpe ratio measure?

Answer 2

Excess return for each unit of risk taken, thus compares manager v manager

Question 3

What does the information ratio measure?

Answer 3

The risk-adjusted return relative to a benchmark, thus compares manager versus the market.

Question 4

What does Alpha measure?

Answer 4

The stock-picking skill of the manager, thus compares manager versus expectations.

Question 5

What’s the formula for the Sharpe ratio?

Answer 5

(Return on investment - risk free rate) / standard deviation of the investment

Question 6

What’s the formula for the information ratio?

Answer 6

(Return on investment - benchmark return) / tracking error

Question 7

What’s the formula for alpha?

Answer 7

Actual return - expected return from CAPM