Practice Test Geeks(CIC) Certified Investment Counselor Practice Test
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Performance Measurement and Reporting Flashcards

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Read the first 7 Performance Measurement and Reporting flashcards as text

  1. What does the Time-Weighted Rate of Return (TWR) measure?

    Answer: The compound growth rate of one unit of currency invested over a period, eliminating the effect of external cash flows

    TWR measures the compound growth of one unit of currency and removes the distorting effect of client-driven cash flows, making it ideal for evaluating manager skill.

  2. Which of the following best describes the Sharpe Ratio?

    Answer: Excess return per unit of total risk (standard deviation)

    The Sharpe Ratio divides a portfolio's excess return (above the risk-free rate) by its standard deviation, measuring reward per unit of total risk.

  3. The Global Investment Performance Standards (GIPS) are maintained by which organization?

    Answer: The CFA Institute

    GIPS standards are developed and maintained by the CFA Institute to ensure fair, consistent, and transparent performance reporting by investment managers.

  4. What does 'alpha' represent in the context of portfolio performance measurement?

    Answer: The excess return of a portfolio relative to its expected return given its beta

    Alpha measures the value added (or destroyed) by the portfolio manager above what would be predicted by the portfolio's market exposure (beta).

  5. Which benchmark characteristic is most important when evaluating a domestic large-cap equity portfolio?

    Answer: The benchmark should be investable, specified in advance, and appropriate to the manager's style

    A valid benchmark must be investable, measurable, specified in advance, and reflect the manager's investment universe and style to ensure meaningful performance comparison.

  6. Which method of return calculation is required under GIPS standards for portfolios with external cash flows?

    Answer: Modified Dietz Method or daily valuation

    GIPS requires the Modified Dietz Method or daily portfolio valuation for periods with external cash flows to produce accurate time-weighted returns.

  7. What is 'tracking error' in the context of portfolio performance?

    Answer: The standard deviation of the difference between portfolio returns and benchmark returns

    Tracking error (also called active risk) is the standard deviation of excess returns (portfolio minus benchmark), quantifying how consistently the manager deviates from the benchmark.

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