Performance Measurement and Reporting Flashcards

What is the primary difference between the Money-Weighted Return (MWR) and the Time-Weighted Return (TWR)?

Answer: MWR is affected by the timing and size of client cash flows while TWR is not

MWR (IRR) reflects the actual investor experience including the timing of contributions and withdrawals, while TWR isolates the manager's skill by removing cash flow timing effects.

The Treynor Ratio measures excess return per unit of which type of risk?

Answer: Systematic risk (beta)

The Treynor Ratio divides excess portfolio return by beta, making it useful for evaluating diversified portfolios where unsystematic risk has been largely eliminated.

In Brinson-Hood-Beebower (BHB) performance attribution, which three effects are analyzed?

Answer: Allocation effect, selection effect, and interaction effect

The BHB model decomposes active return into allocation (over/underweighting sectors), selection (security picking within sectors), and interaction (combined allocation and selection decisions).

What is 'survivorship bias' in investment performance reporting?

Answer: The overstatement of historical returns caused by excluding funds that failed or were liquidated

Survivorship bias inflates reported industry returns because only successful (surviving) funds are included in historical databases, excluding the poor performers that closed.

Under GIPS standards, what is a 'composite'?

Answer: An aggregation of all discretionary portfolios managed according to a similar investment mandate or strategy

A GIPS composite groups all fee-paying, discretionary portfolios managed to a similar strategy so that performance reflects the full opportunity set, preventing cherry-picking of accounts.

The Information Ratio (IR) is calculated as:

Answer: Active return divided by tracking error

The Information Ratio equals the portfolio's active return (portfolio minus benchmark) divided by tracking error, measuring the consistency and magnitude of a manager's active bets.

Which of the following is a requirement for GIPS compliance regarding performance history presentation?

Answer: Firms must show a minimum of 5 years, building to 10 years over time

GIPS requires firms to initially present at least 5 years of compliant performance history (or since inception), then build toward a 10-year record by adding one year annually.