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

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.

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

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.

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

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.

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

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.

Question 5

Survivorship bias in investment performance reporting occurs when:

Accepted Answer

Poorly performing or closed funds are excluded from historical performance databases

Answer

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.

(RIA) Registered Investment Advisor Practice Test

(RIA) Registered Investment Advisor Practice Test

RIA Performance Reporting & Benchmarking 3