RIA Performance Reporting & Benchmarking 3

Question 1

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

Accepted Answer

Beta

Answer

Standard deviation

Answer

Tracking error

Answer

Variance

Question 2

Jensen's alpha measures portfolio performance as:

Accepted Answer

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

Answer

The portfolio return minus the risk-free rate

Answer

The Sharpe ratio minus the Treynor ratio

Answer

Active return per unit of tracking error

Question 3

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

Accepted Answer

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

Answer

Performance includes all management fees and transaction costs deducted

Answer

Performance excludes both management fees and all taxes

Answer

Performance is calculated using pre-tax income only

Question 4

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

Accepted Answer

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

Answer

A client has a single-asset-class portfolio

Answer

GIPS requires all composites to use a single market index

Answer

A manager wants to minimize the appearance of underperformance

Question 5

Survivorship bias in investment performance reporting occurs when:

Accepted Answer

Poorly performing or closed funds are excluded from historical performance databases

Answer

Only the longest-tenured accounts are included in composites

Answer

New accounts are added before they have a full year of performance

Answer

Performance is reported only during bull markets

Question 6

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

Accepted Answer

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

Answer

The difference between gross and net composite returns

Answer

How the composite benchmark performed relative to the market

Answer

The number of portfolios added or removed from the composite

Question 7

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

Accepted Answer

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

Answer

TWR is easier to calculate for large portfolios

Answer

TWR always produces a higher return than MWR

Answer

TWR is required by the SEC for all registered advisors