IMC Performance Measurement and Attribution 2

Question 1

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

Accepted Answer

Total risk (standard deviation)

Answer

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

Question 2

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

Accepted Answer

10.0

Answer

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

Question 3

Jensen's alpha is best described as:

Accepted Answer

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

Answer

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

Question 4

Tracking error is defined as the standard deviation of:

Accepted Answer

Active returns (portfolio return minus benchmark return)

Answer

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

Question 5

The information ratio is calculated as:

Accepted Answer

Active return / Tracking error

Answer

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

IMC Practice Test