RIA Performance Reporting & Benchmarking 2

Question 1

The Sharpe ratio of a portfolio is calculated as which of the following?

Accepted Answer

(Portfolio Return – Risk-Free Rate) / Standard Deviation

Answer

The Sharpe ratio equals (Portfolio Return – Risk-Free Rate) / Standard Deviation, measuring excess return per unit of total volatility.

Question 2

In investment performance attribution, 'alpha' most accurately refers to:

Accepted Answer

The excess return of a portfolio above what would be predicted by its level of systematic risk

Answer

Alpha represents the portion of a portfolio's return not explained by systematic risk (beta), indicating skill or luck in active management.

Question 3

Which type of benchmark is most commonly used for domestic large-cap equity portfolios in the United States?

Accepted Answer

S&P 500 Index

Answer

The S&P 500 is the most widely used benchmark for domestic large-cap U.S. equity portfolios, representing the 500 largest publicly traded U.S. companies.

Question 4

Performance attribution analysis is primarily used to:

Accepted Answer

Identify the sources of a portfolio's return relative to its benchmark

Answer

Performance attribution decomposes active return into components (e.g., allocation, selection, interaction) to explain why a portfolio outperformed or underperformed its benchmark.

Question 5

The information ratio is best described as:

Accepted Answer

Active return divided by tracking error

Answer

The information ratio equals active return (portfolio return minus benchmark return) divided by tracking error (standard deviation of active returns), measuring consistency of outperformance.

(RIA) Registered Investment Advisor Practice Test

(RIA) Registered Investment Advisor Practice Test

RIA Performance Reporting & Benchmarking 2