CPS Performance Measurement and Evaluation 2

Question 1

The Information Ratio is calculated as:

Accepted Answer

Active return divided by tracking error

Answer

The Information Ratio divides active return (portfolio return minus benchmark return) by tracking error (standard deviation of active returns), measuring the consistency and efficiency of active management.

Question 2

Tracking error in portfolio performance measurement is defined as:

Accepted Answer

The standard deviation of a portfolio's excess returns relative to its benchmark

Answer

Tracking error is the standard deviation of the difference between a portfolio's periodic returns and its benchmark's returns, measuring the consistency of active management.

Question 3

The Sortino Ratio improves upon the Sharpe Ratio by:

Accepted Answer

Using only downside deviation rather than total standard deviation

Answer

The Sortino Ratio uses downside deviation (only below-target return variability) in the denominator, capturing the risk investors actually care about—losing money—rather than penalizing upside volatility.

Question 4

Maximum drawdown is best defined as:

Accepted Answer

The largest peak-to-trough decline in portfolio value during a specified period

Answer

Maximum drawdown measures the largest loss from a historical peak to a subsequent trough before a new peak is reached, representing the worst-case scenario an investor could have experienced.

Question 5

The Calmar Ratio is particularly useful for evaluating which type of investment strategy?

Accepted Answer

Hedge funds and managed futures programs with non-normal return distributions

Answer

The Calmar Ratio, calculated as compound annual growth rate divided by maximum drawdown, is especially useful for hedge funds and managed futures where tail risk and drawdown are key concerns.

CPS - Certified Portfolio Specialist Practice Test

CPS - Certified Portfolio Specialist Practice Test

CPS Performance Measurement and Evaluation 2