CH18 Flashcards
(34 cards)
What is a time-weighted return?
The geometric average where each period’s return has equal weight.
It is calculated using the formula G = (1 + r1) × (1 + r2) × … × (1 + rn)^(1/n) - 1.
What are dollar-weighted returns?
Internal rate of return considering the cash flow from or to investment.
Returns are weighted by the amount invested in each period.
What does the term ‘comparison universe’ refer to?
A set of portfolio managers with similar investment styles used to assess relative performance.
What is the Sharpe Ratio?
A reward-to-volatility ratio, representing excess return to standard deviation.
It is calculated as S = (r_p - r_f) / σ_p.
What is the formula for the Treynor Measure?
The ratio of portfolio excess return to beta: T = (R_p - R_f) / β.
What does the Information Ratio measure?
The ratio of alpha to standard deviation of diversifiable risk.
Fill in the blank: The _______ considers the variance of the market-driven return component.
Variance
What is the purpose of the single index model in performance evaluation?
To measure abnormal performance by comparing to normal performance.
What does the M2 Measure represent?
The return difference between a managed portfolio leveraged to match the volatility of a passive index and the return on that index.
Explain the concept of risk-adjusted performance.
Performance that is measured considering the risk taken to achieve that performance.
True or False: The dollar-weighted average is typically higher than the time-weighted average.
False
What did William Sharpe’s 1992 study reveal about mutual fund performance?
91.5% of variation in return could be explained by the funds’ asset allocations to bills, bonds, and stocks.
What is the significance of alpha in performance measures?
Alpha indicates the excess return of an investment relative to the return of a benchmark index.
Fill in the blank: The _______ is used when choosing among competing portfolios that will not be mixed.
Sharpe Ratio
What is the formula for calculating expected return using the single index model?
E(R_P) = β_P * E(R_M) + α_P
What does a higher Information Ratio indicate?
A higher alpha relative to the amount of risk taken.
What is the relationship between risk and return in the context of performance evaluation?
Higher risk is generally associated with the potential for higher returns.
What does the variance of return on the market represent?
The degree of fluctuation in returns that can be attributed to market movements.
What is Morningstar’s Risk-Adjusted Rating?
A rating system that ranks mutual funds based on risk-adjusted performance and assigns stars accordingly.
Peer groups established based on Morningstar style definitions
What does RAR stand for in mutual fund analysis?
Risk-Adjusted Return
Used to evaluate the performance of funds relative to their risk.
What is a survivorship bias?
An upward bias in average fund performance due to not accounting for failed funds over the sample period.
This can distort the perceived performance of mutual funds.
What is the problem with performance measures for funds?
They can be particularly problematic for funds engaging in active asset allocation.
This is due to the assumption of maintaining a constant level of risk.
True or False: There is strong evidence of persistent market-timing ability.
False
Little evidence exists for consistent market timing success.
What is market timing in investment strategy?
Adjusting asset allocation based on expected changes in market conditions.
This can involve shifting between stocks and bonds or money market instruments.
