Risk and Performance Measurement Flashcards

Which risk measure captures the average loss in the worst-case scenarios beyond the Value at Risk threshold?

Answer: Expected Shortfall (CVaR)

Expected Shortfall (Conditional VaR) measures the average loss in the tail beyond the VaR cutoff, providing a more complete picture of tail risk.

A portfolio has an annualized return of 12% with a standard deviation of 18%. The risk-free rate is 3%. What is the Sharpe ratio?

Answer: 0.50

Sharpe ratio = (12% - 3%) / 18% = 9% / 18% = 0.50.

Which of the following best describes systematic risk in a portfolio context?

Answer: Market-wide risk that cannot be diversified away

Systematic risk is market-wide risk driven by macroeconomic factors that affects all assets and cannot be eliminated through diversification.

The Treynor ratio differs from the Sharpe ratio in that it uses which measure in the denominator?

Answer: Beta

The Treynor ratio uses beta (systematic risk) in the denominator, while the Sharpe ratio uses standard deviation (total risk).

An investor measures downside risk using a target return of 5%. Which risk metric is most appropriate?

Answer: Sortino ratio denominator (downside deviation)

Downside deviation (used in the Sortino ratio) only penalizes returns falling below a specified target, capturing downside risk relative to that threshold.

Which performance attribution component isolates the manager's skill in selecting individual securities within each sector?

Answer: Selection effect

The selection effect in Brinson-Hood-Beebower attribution measures the manager's ability to pick securities that outperform the benchmark within a sector.

A bond portfolio has a duration of 6 years and interest rates rise by 50 basis points. Approximately how much will the portfolio value change?

Answer: -3.0%

Price change ≈ -Duration × ΔRate = -6 × 0.005 = -0.03, or approximately -3.0%.