IMC Performance Measurement and Attribution

Question 1

Which return measure eliminates the distorting effect of external cash flows and is most appropriate for evaluating investment manager performance?

Accepted Answer

Time-weighted return

Answer

Time-weighted return removes the impact of the timing and size of external cash flows, making it the standard for comparing manager performance across firms.

Question 2

A portfolio is worth £100,000 at the start of the year. After six months it grows to £110,000 before an additional £20,000 is invested. By year end the portfolio is worth £143,000. What is the approximate time-weighted return for the year?

Accepted Answer

21.0%

Answer

Sub-period 1: £110,000/£100,000 − 1 = 10%; Sub-period 2: £143,000/£130,000 − 1 = 10%; TWR = (1.10 × 1.10) − 1 = 21%.

Question 3

A portfolio achieves a return of 12% while its benchmark returns 9%. What is the active return?

Accepted Answer

3%

Answer

Active return (alpha) = portfolio return − benchmark return = 12% − 9% = 3%.

Question 4

Which of the following is NOT a characteristic of a valid performance measurement benchmark?

Accepted Answer

Chosen retrospectively to match the best-performing index that year

Answer

A valid benchmark must be specified in advance; selecting it retrospectively to flatter results violates the principle of objectivity.

Question 5

An investor purchases a share for £50, receives a dividend of £2 during the year, and sells the share for £55. What is the holding period return?

Accepted Answer

14%

Answer

Holding period return = (ending price − beginning price + income) / beginning price = (£55 − £50 + £2) / £50 = 14%.

IMC Practice Test

IMC Practice Test

IMC Performance Measurement and Attribution