Portfolio Performance and DFM

Question 1

How can time weighted return be defined and what does it enable investors to do?

Answer 1

It enables investors to determine the rates of return taking into accout where capital is added or withdrawn from the available investment fund.

The TWR allows for a fair comparison of fund management performance, and is far more accurate that the MWR as it disregards the timing of cashflows outwith the fund managers control.

Question 2

What are the three main methods of measuring risk adjusted returns?

Answer 2

• Sharpe ratio
• Alpha
• information ratio

Question 3

What does the sharpe ratio measure?

Answer 3

• Sharpe ratio measures the excess return for every uit of risk taken
• Sharpe ratio should be positive and the higher the better.
• Negative sharpe ratios are misleading and should not be relied upon.

Question 4

Which two types of investment analysis are used by fund managers in the ‘stock selection’ stage of top-down management?

Answer 4

Fundamental and technical analysis

• Fundamental analysis is a detailed analysis of the company concerned and the industry in which it operates.
• Technical analysis involves analysing past share prices & making investment decisions on the basis of trends.

Question 5

Which of the following are likely to be more volatile, if all invested in the Far East?

investment trust

unit trust

OEIC

structured product

Answer 5

Investment Trust

• Close ended and generally trade at a discount to NAV
• ITs can gear the investment

Question 6

Formula for Sharpe ratio?

Answer 6

Return - risk free rate / standard deviation

Question 7

Forumla for Information ratio?

Answer 7

Return - benchmark return / tracking error

Question 8

What factors should be considered when desigining a client portfolio?

Answer 8

EPIC FACT

Experience of investing

Psychology

Insurance cover

Cash reserves

Family situation

Age and time horizon

Current net worth and income expectations

Taxation

Question 9

How