CPS Performance Measurement and Evaluation

Question 1

The Sharpe Ratio measures which of the following?

Accepted Answer

Excess return per unit of total risk (standard deviation)

Answer

The Sharpe Ratio calculates excess return (portfolio return minus risk-free rate) divided by the portfolio's standard deviation, representing total risk.

Question 2

The Treynor Ratio differs from the Sharpe Ratio in that it uses which measure of risk in its denominator?

Accepted Answer

Beta

Answer

The Treynor Ratio uses beta (systematic risk) as its denominator, making it appropriate for evaluating well-diversified portfolios where unsystematic risk has been eliminated.

Question 3

When evaluating a portfolio manager's skill in selecting individual securities, which metric is most directly appropriate?

Accepted Answer

Jensen's Alpha

Answer

Jensen's Alpha measures the excess return above or below the CAPM-predicted return, directly indicating how much value the manager added through security selection.

Question 4

Time-weighted return (TWR) is preferred over money-weighted return (MWR) primarily when:

Accepted Answer

Evaluating manager performance independent of client cash flows

Answer

TWR eliminates the distorting impact of external cash flows, making it the standard method for fairly evaluating a portfolio manager's performance independent of client deposit and withdrawal timing.

Question 5

A portfolio has a standard deviation of 15% and the market has a standard deviation of 10%. If the correlation between them is 0.8, what is the portfolio's beta?

Accepted Answer

1.20

Answer

Beta = (portfolio σ / market σ) × correlation = (15/10) × 0.8 = 1.2, indicating the portfolio is more volatile than the market.

CPS - Certified Portfolio Specialist Practice Test

CPS - Certified Portfolio Specialist Practice Test

CPS Performance Measurement and Evaluation