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Performance Measurement and Attribution Flashcards

7 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. The Sharpe ratio measures excess return per unit of which type of risk?

    Answer: Total risk (standard deviation)

    Sharpe ratio = (Portfolio return − Risk-free rate) / Standard deviation of portfolio returns, capturing return per unit of total risk.

  2. A portfolio returns 15%, the risk-free rate is 4%, and the portfolio's beta is 1.1. What is the Treynor ratio?

    Answer: 10.0

    Treynor ratio = (Portfolio return − Risk-free rate) / Beta = (15% − 4%) / 1.1 = 10.0.

  3. Jensen's alpha is best described as:

    Answer: The portfolio's actual return minus its CAPM-expected return given its level of systematic risk

    Jensen's alpha = Actual return − [Risk-free rate + beta × (Market return − Risk-free rate)], measuring outperformance relative to what CAPM predicts.

  4. Tracking error is defined as the standard deviation of:

    Answer: Active returns (portfolio return minus benchmark return)

    Tracking error measures the variability of a portfolio's returns relative to its benchmark, quantifying active risk.

  5. The information ratio is calculated as:

    Answer: Active return / Tracking error

    Information ratio = Active return / Tracking error, measuring the reward earned per unit of active risk taken relative to the benchmark.

  6. Which risk-adjusted performance measure is most appropriate when evaluating a portfolio that forms one component of a larger, well-diversified overall portfolio?

    Answer: Treynor ratio

    The Treynor ratio uses systematic risk (beta) in its denominator and is the preferred measure when the portfolio is a component of a broader diversified portfolio where unsystematic risk is already eliminated.

  7. A portfolio manager achieves a Sharpe ratio of 0.85 compared to the market's Sharpe ratio of 0.60. What does this indicate?

    Answer: The portfolio has earned more excess return per unit of total risk than the market

    A higher Sharpe ratio means the portfolio has generated more excess return above the risk-free rate for each unit of total risk (standard deviation) relative to the market.