Risk, Return & Investment Performance Flashcards

A portfolio has a standard deviation of 12% and the market standard deviation is 10%. The correlation between the portfolio and market is 0.8. What is the portfolio's beta?

Answer: 0.96

Beta = (portfolio std dev / market std dev) × correlation = (12/10) × 0.8 = 0.96.

Which performance metric penalizes a portfolio manager only for downside volatility, not total volatility?

Answer: Sortino ratio

The Sortino ratio uses downside deviation in the denominator rather than total standard deviation.

An investor's portfolio returned 9% while the benchmark returned 7%. The portfolio's tracking error was 3%. What is the information ratio?

Answer: 0.67

Information ratio = active return / tracking error = (9% − 7%) / 3% = 0.67.

When comparing two portfolios with different betas, which measure is most appropriate for evaluating risk-adjusted performance?

Answer: Treynor ratio

The Treynor ratio uses beta as the risk measure, making it ideal for comparing portfolios with different levels of systematic risk.

A bond's duration is 6 years and interest rates rise by 1%. Approximately what happens to the bond's price?

Answer: Falls by 6%

Using the duration approximation, price change ≈ −duration × Δy = −6 × 1% = −6%.

Which of the following best describes the 'risk premium' in the context of expected returns?

Answer: The extra return above the risk-free rate demanded by investors

The risk premium is the additional expected return investors require above the risk-free rate to compensate for bearing risk.

Portfolio A has a Sharpe ratio of 1.2 and Portfolio B has a Sharpe ratio of 0.9. Which conclusion is most accurate?

Answer: Portfolio A provides better risk-adjusted return per unit of total risk

A higher Sharpe ratio means more excess return per unit of total (standard deviation) risk, not necessarily higher absolute returns.