CFM Valuation & Performance Measurement Flashcards

In the Capital Asset Pricing Model (CAPM), what does beta measure?

Answer: A security's sensitivity to systematic (market) risk

Beta measures the degree to which a security's returns move relative to the overall market; a beta of 1.2 means the security tends to move 20% more than the market.

What does the Treynor ratio measure?

Answer: Excess return earned per unit of systematic risk (beta)

The Treynor ratio uses beta in the denominator rather than standard deviation, making it appropriate for evaluating portfolios within a diversified overall portfolio.

What is tracking error in the context of fund management?

Answer: The standard deviation of the difference between a fund's returns and its benchmark returns

Tracking error quantifies how consistently a fund's active returns deviate from the benchmark; lower tracking error indicates a more index-like strategy.

What is the Calmar ratio used to evaluate?

Answer: Annualized return divided by maximum drawdown, measuring return per unit of drawdown risk

The Calmar ratio focuses on tail risk by measuring how much return a fund generates per unit of its worst observed loss, making it popular in hedge fund evaluation.

What is the money-weighted rate of return (MWRR) also known as?

Answer: Internal rate of return (IRR)

MWRR equals the IRR that sets the present value of all cash flows equal to the ending portfolio value, reflecting the investor's actual dollar experience including timing of contributions.

What does a Price-to-Book (P/B) ratio below 1.0 typically indicate?

Answer: The stock is trading below the net asset value recorded on the company's balance sheet

A P/B below 1.0 means the market values the company at less than its book equity, which may signal deep value opportunity or concerns about asset quality and future profitability.