Performance Management and Risk Measures Quiz

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Questions and Answers

What does the allocation effect measure?

  • The manager's total value-added performance
  • Manager's ability to time the market segments effectively
  • Manager's decision to over- or underweight a particular market segment (correct)
  • Manager's ability to create specific market segment portfolios

How is the allocation effect calculated?

  • [(Rpi − Rbi ) + (Wpi - Wbi )]
  • [(Wpi - Wbi ) * (Rbi − Rb)] (correct)
  • [(Rpi − Rbi ) * (Wpi - Wbi )]
  • [Wpi - Wbi ] / [Rbi − Rb]

What is good timing skill a matter of, according to the given text?

  • Timing the market segments effectively
  • Creating specific market segment portfolios
  • Balancing the portfolio weight and benchmark weight
  • Investing more money in market segments producing greater-than-average returns (correct)

What does the selection effect measure?

<p>Manager's ability to create specific market segment portfolios (C)</p> Signup and view all the answers

How is the selection effect calculated?

<p>[Rpi − Rbi ] * [Wpi - Wbi ] (B)</p> Signup and view all the answers

What is the manager's total value-added performance according to the given text?

<p>The sum of allocation and selection effects (D)</p> Signup and view all the answers

Which factor is important for good timing skill, based on the text?

<p>Market segment performance relative to benchmark return (D)</p> Signup and view all the answers

What does the term 'Wpi - Wbi' represent in the allocation effect equation?

<p>'Portfolio weight – Benchmark weight' (D)</p> Signup and view all the answers

'Rpi − Rbi' in the selection effect equation represents:

<p>'Portfolio return – Benchmark return' (B)</p> Signup and view all the answers

'(Benchmark weight) * (Portfolio return – Benchmark return)' in the selection effect equation calculates:

<p>'Selection Effect' (B)</p> Signup and view all the answers

Which of the following is an essential attribute of a fund manager?

<p>The ability to derive above-average returns for a given risk class (B)</p> Signup and view all the answers

What is the main goal of superior security selection by a fund manager?

<p>To find undervalued securities (A)</p> Signup and view all the answers

What is the primary purpose of attribution analysis in performance measurement?

<p>To determine the impact of market timing on portfolio returns (B)</p> Signup and view all the answers

What differentiates allocation effects from selection effects in attribution analysis?

<p>Allocation effects relate to changes in asset allocation, while selection effects relate to security choices (A)</p> Signup and view all the answers

What is the significance of completely diversifying a portfolio relative to its benchmark portfolio?

<p>It eliminates unsystematic risk (A)</p> Signup and view all the answers

Which factor contributes to the actual return produced by a manager over an investment horizon?

<p>The return that should have been earned given the capital commitment and the amount of risk in the portfolio (B)</p> Signup and view all the answers

What can lead to superior risk-adjusted returns for a fund manager?

<p>Superior timing and security selection (C)</p> Signup and view all the answers

What are the two main considerations in performance management?

<p>Risk-adjusted measures and attribution analysis (D)</p> Signup and view all the answers

What is the desired attribute of a completely diversified portfolio in relation to its benchmark portfolio?

<p>Perfectly correlated with the fully diversified benchmark portfolio (D)</p> Signup and view all the answers

What contributes to deriving above-average returns for a given risk class as a fund manager?

<p>The ability to diversify the portfolio completely to eliminate unsystematic risk (B)</p> Signup and view all the answers

Which method does not contribute to evaluating expected returns?

<p>Performance assessment (C)</p> Signup and view all the answers

What are the limitations of peer group comparisons in evaluating expected returns?

<p>Both a and b (A)</p> Signup and view all the answers

What does portfolio drawdown measure?

<p>How well the manager protected investors against losses (C)</p> Signup and view all the answers

Which ratio measures risk premium per unit of risk?

<p>Sharpe Ratio (D)</p> Signup and view all the answers

What does Treynor Ratio measure?

<p>Portfolio's return in excess of the risk-free rate per unit of beta (C)</p> Signup and view all the answers

What does Information Ratio measure?

<p>Average return in excess of a benchmark portfolio divided by the tracking error (D)</p> Signup and view all the answers

What does Jensen Measure calculate?

Signup and view all the answers

How can risk-adjusted performance be computed relative to any multifactor model?

<p>Through attribution analysis (C)</p> Signup and view all the answers

What is the aim of Sharpe Ratio?

<p>To measure risk premium per unit of risk (B)</p> Signup and view all the answers

What is one limitation of peer group comparisons?

<p>Difficulty in forming a large, meaningful group (C)</p> Signup and view all the answers

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Study Notes

  • Investors evaluate expected returns using three methods: peer group comparisons, index returns, and risk factor models
  • Performance assessment involves answering two questions: how did the portfolio manager perform, and what resources were used to achieve it
  • Peer group comparisons use boxplots to display returns of a representative set of investors over a specific period, but they have limitations such as lack of adjustment for risk levels and difficulty in forming a large, meaningful group
  • Portfolio drawdown measures how well the manager protected investors against losses, with maximum drawdown being the largest percentage decline in value from peak to trough
  • Risk-adjusted performance measures include Sharpe Ratio, Treynor Ratio, and Information Ratio, which aim to measure a portfolio's total risk and performance relative to a benchmark
  • Sharpe Ratio measures risk premium per unit of risk by subtracting the risk-free rate from the portfolio's return and dividing by the standard deviation of returns
  • Treynor Ratio measures the portfolio's return in excess of the risk-free rate per unit of beta, indicating the slope of the fund's characteristic line and its position relative to the security market line
  • Information Ratio measures a portfolio's average return in excess of a benchmark portfolio divided by the tracking error
  • Jensen Measure, originally based on CAPM, calculates the difference between a portfolio's return and the return expected based on market conditions, with α indicating the manager's superiority or inferiority in investment ability.
  • Risk-adjusted performance can be computed relative to any multifactor model, with attribution analysis decomposing the difference between a manager's total return and a benchmark policy portfolio into allocation and selection effects.

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