CFM CFM Valuation & Performance Measurement

Question 1

What does the Sharpe ratio measure in fund performance evaluation?

Accepted Answer

Excess return per unit of total risk (standard deviation)

Answer

The Sharpe ratio divides a portfolio's excess return over the risk-free rate by its standard deviation, measuring return per unit of total risk.

Question 2

What is the information ratio (IR) used to assess?

Accepted Answer

Active return relative to benchmark per unit of tracking error

Answer

The IR measures a manager's ability to generate excess returns relative to a benchmark, divided by the variability of those excess returns (tracking error).

Question 3

What does time-weighted rate of return (TWRR) eliminate from performance measurement?

Accepted Answer

The distorting effect of investor cash flows on portfolio returns

Answer

TWRR breaks the measurement period into sub-periods at each cash flow event, preventing external cash flows from distorting the manager's actual investment performance.

Question 4

In the context of CAPM, what does alpha represent?

Accepted Answer

The return generated in excess of what CAPM predicts given the portfolio's beta

Answer

Alpha (Jensen's alpha) is the intercept of the security characteristic line and represents value added by the manager beyond market-driven returns.

Question 5

How does the Sortino ratio differ from the Sharpe ratio?

Accepted Answer

The Sortino ratio uses downside deviation instead of total standard deviation

Answer

The Sortino ratio only penalizes harmful downside volatility, making it more relevant for investors who are unconcerned about upside price variation.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM CFM Valuation & Performance Measurement