Measuring Portfolio Performance

Question 1

Holding period return formula

Answer 1

(Income received + value at end - value at beginning) / value at beginning

Question 2

Relative return formula

Answer 2

Total return - benchmark return

Question 3

Money weighted rate of return formula

Answer 3

(Income received + value at end - value at beginning - new money introduced in year) / (value at beginning + (new money introduced in year x n/12))

Question 4

Time weighted rate of return formula

Answer 4

MWR x MWR

Question 5

Performance attribution - steps

Answer 5

• Choose appropriate benchmark for each asset class
• Check benchmark asset allocation
• Work out return for each asset class as if it had performed in line with sector index
• Compare benchmark with actual portfolio performance to see if manager has added value by outperforming index in terms of asset allocation
• Calculate effect of stock selection / sector choice

Question 6

What is performance attribution used for?

Answer 6

To show contribution of:
- Asset allocation
- Stock selection
- Market timing
- Risk
to returns

Question 7

Risk adjusted returns - Sharpe ratio - what does it measure and what is the formula?

Answer 7

• Measures excess return for every unit of risk that is taken to achieve return
• Risk measured by Standard Deviation of returns

(Return on investment - risk free return) / standard deviation

Question 8

Risk adjusted returns - Alpha - what does it measure and what is the formula?

Answer 8

• Quantifies the value added or taken away by fund manager
• Difference between return expected, given its beta, and return actually achieved

Actual return - (RF + B(RM - RF))

Question 9

Risk adjusted returns - Information ratio - what does it measure and what is the formula?

Answer 9

• Used to assess risk-adjusted performance of active portfolio managers vs a benchmark
• Higher ratio = higher added value

(RP - RB) / tracking error