Portfolio Management Flashcards

Alpha in portfolio performance measurement represents:

Answer: The portfolio's excess return above what is expected given its level of systematic risk

Alpha is the risk-adjusted excess return a portfolio generates above the return predicted by its beta (systematic risk), indicating the value added by active management.

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

Answer: Beta (systematic risk)

The Treynor ratio divides excess return by beta, measuring return per unit of systematic risk, making it most useful for evaluating well-diversified portfolios where unsystematic risk is minimal.

Jensen's alpha is calculated using which model?

Answer: The Capital Asset Pricing Model (CAPM)

Jensen's alpha measures the portfolio's actual return minus the return predicted by CAPM based on its beta, representing risk-adjusted outperformance.

When evaluating a portfolio manager over a period when significant cash flows occurred, which return method is MOST appropriate to assess the manager's investment skill?

Answer: Time-weighted return

Time-weighted return eliminates the impact of external cash flows that are outside the manager's control, providing a pure measure of investment decision-making skill.

The information ratio measures a portfolio manager's ability to:

Answer: Generate consistent excess returns relative to a benchmark per unit of tracking error

The information ratio equals active return (portfolio return minus benchmark return) divided by tracking error, measuring how efficiently a manager generates excess returns.

A benchmark used to evaluate portfolio performance should be:

Answer: Specified in advance and investable, with returns that are measurable and appropriate to the manager's style

A valid benchmark must be pre-specified, investable, measurable, and reflective of the manager's investment universe and style to provide a meaningful performance comparison.

Which of the following scenarios BEST illustrates a portfolio with high tracking error?

Answer: An actively managed equity fund whose sector weights differ substantially from its benchmark

Tracking error measures how much a portfolio's returns deviate from its benchmark; significant sector or security deviations from the index produce high tracking error.