Performance Reporting & Benchmarking Flashcards

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

Answer: Beta

The Treynor ratio uses beta (systematic risk) in its denominator, making it appropriate for evaluating a portfolio that is one component of a larger, well-diversified portfolio.

Jensen's alpha measures portfolio performance as:

Answer: The portfolio's actual return minus its CAPM-expected return given its beta

Jensen's alpha = Actual Return – [Rf + Beta × (Rm – Rf)], representing the return generated above what the Capital Asset Pricing Model would predict for the portfolio's level of systematic risk.

When performance is reported 'gross of fees,' what does this mean?

Answer: Performance is calculated before deducting investment management fees but may include transaction costs

Gross-of-fees performance reflects returns before deducting investment management fees, though trading expenses are typically still reflected; it shows the manager's raw investment skill.

A 'custom benchmark' (also called a blended or policy benchmark) is most appropriate when:

Answer: A portfolio's multi-asset strategy does not correspond to any single published index

Custom benchmarks are appropriate for multi-asset or balanced portfolios where a combination of indices (blended to match the target asset allocation) better reflects the portfolio's investment strategy.

Survivorship bias in investment performance reporting occurs when:

Answer: Poorly performing or closed funds are excluded from historical performance databases

Survivorship bias inflates reported historical performance because funds that failed or were closed (typically poor performers) are removed from databases, leaving only surviving (often better-performing) funds.

In a GIPS-compliant performance presentation, composite dispersion is primarily used to show:

Answer: The range of individual portfolio returns within the composite during the period

Composite dispersion measures the spread of individual portfolio returns within the composite for a given year, indicating how consistently the strategy was implemented across accounts.

Which of the following statements best describes why time-weighted return (TWR) is preferred over money-weighted return (MWR) for evaluating investment manager performance?

Answer: TWR removes the effect of client-directed cash flows which the manager does not control

TWR neutralizes the timing and size of client cash flows (deposits and withdrawals) that the manager does not control, isolating the manager's actual investment decisions for a fair performance evaluation.