FIN 420: FINAL EXAM QUESTIONS AND ANSWERS
What is the most common way to measure a return? - Answers :Holding Period Return
What is a Holding Period Return? - Answers :The return on an asset or portfolio over
the whole period during which it was held
What are the most common methods to consider average returns? - Answers :Dollar
and time weighted returns
What are money-weighted returns used to show? - Answers :They're used to show how
a single, standalone asset performed over time
What is used to find a money weighted return? - Answers :The Internal Rate of Return
What are time-weighted returns used for? - Answers :They're used to compare a
portfolio to a benchmark
What does the Sharpe Ratio do? - Answers :Scales the investment's excess returns to
total risk
What is total risk measured by? - Answers :standard deviation
What is an excess return? - Answers :The spread of return over the risk-free rate
What is the Sharpe Ratio used for? - Answers :Used to compare undiversified assets
How is the Sharpe ratio number expressed? - Answers :Expressed as excess return per
unit of total risk
What does the M2 measure find? - Answers :Finds the spread between the sharpe
ratios of a financial asset and the broader market
What is the Treynor Ratio? - Answers :Uses a combination of the Sharpe ratio and beta
to measure the excess returns per total unit of risk when combining diversified assets
What is beta? - Answers :Systematic risk exposure, the risk of the market itself
When is the Treynor Ratio used? - Answers :Used when combining a diversified
investment with a pool of diversified investments
What is the Sortino Ratio? - Answers :A measure that uses the Sharpe Ratio as a basis
in conjunction with downside semi-variance
What is downside semi-variance? - Answers :The downside of standard deviation
, What is the Information ratio? - Answers :Determines if an active manager is properly
compensating investors for the level of benchmark-relative risk that they're taking
What is alpha? - Answers :The portfolio's return minus the benchmark's return
What is tracking error? - Answers :Standard deviation of the difference between the
portfolio return and the benchmark return:
What does a time-weighted return do? - Answers :This type geometrically links returns
to smooth out the otherwise distorting effect of cash inflows and outflows (such as
buying new shares)
How is a time-weighted return found? - Answers :Found by calculating the geometric
average
What geometrically links independent holding period returns? - Answers :time-weighted
returns
What is risk-adjusted performance based on? - Answers :The risk-reward tradeoff
What is the Risk-Reward tradeoff? - Answers :To realize greater rewards, one must
accept a greater risk
What is active share? - Answers :The weighting deviation that an active manager
deploys relative to their benchmark
What is performance attribution? - Answers :The technique applies a series of analytical
formulas to drill down on an investment manager's decisions?
What is the goal of performance attribution? - Answers :To determine if the manager
added alpha (beating the benchmark) by selecting active weights or by selecting
investments within the sectors
What is a mutual fund wholesaler? - Answers :The sales rep for a given mutual fund
What is the allocation effect? - Answers :Measures the active weight difference between
the sector allocation for an investment and the sector allocation for their benchmark,
then is multiplied by the sector active return which is the difference between the return
earned by the sector benchmark and the return earned by the total benchmark
What is W(p)? - Answers :A portfolio's sector allocation
What is W(sb)? - Answers :The sector allocation of the benchmark
What is R(sb)? - Answers :The return earned by the sector benchmark
What is the most common way to measure a return? - Answers :Holding Period Return
What is a Holding Period Return? - Answers :The return on an asset or portfolio over
the whole period during which it was held
What are the most common methods to consider average returns? - Answers :Dollar
and time weighted returns
What are money-weighted returns used to show? - Answers :They're used to show how
a single, standalone asset performed over time
What is used to find a money weighted return? - Answers :The Internal Rate of Return
What are time-weighted returns used for? - Answers :They're used to compare a
portfolio to a benchmark
What does the Sharpe Ratio do? - Answers :Scales the investment's excess returns to
total risk
What is total risk measured by? - Answers :standard deviation
What is an excess return? - Answers :The spread of return over the risk-free rate
What is the Sharpe Ratio used for? - Answers :Used to compare undiversified assets
How is the Sharpe ratio number expressed? - Answers :Expressed as excess return per
unit of total risk
What does the M2 measure find? - Answers :Finds the spread between the sharpe
ratios of a financial asset and the broader market
What is the Treynor Ratio? - Answers :Uses a combination of the Sharpe ratio and beta
to measure the excess returns per total unit of risk when combining diversified assets
What is beta? - Answers :Systematic risk exposure, the risk of the market itself
When is the Treynor Ratio used? - Answers :Used when combining a diversified
investment with a pool of diversified investments
What is the Sortino Ratio? - Answers :A measure that uses the Sharpe Ratio as a basis
in conjunction with downside semi-variance
What is downside semi-variance? - Answers :The downside of standard deviation
, What is the Information ratio? - Answers :Determines if an active manager is properly
compensating investors for the level of benchmark-relative risk that they're taking
What is alpha? - Answers :The portfolio's return minus the benchmark's return
What is tracking error? - Answers :Standard deviation of the difference between the
portfolio return and the benchmark return:
What does a time-weighted return do? - Answers :This type geometrically links returns
to smooth out the otherwise distorting effect of cash inflows and outflows (such as
buying new shares)
How is a time-weighted return found? - Answers :Found by calculating the geometric
average
What geometrically links independent holding period returns? - Answers :time-weighted
returns
What is risk-adjusted performance based on? - Answers :The risk-reward tradeoff
What is the Risk-Reward tradeoff? - Answers :To realize greater rewards, one must
accept a greater risk
What is active share? - Answers :The weighting deviation that an active manager
deploys relative to their benchmark
What is performance attribution? - Answers :The technique applies a series of analytical
formulas to drill down on an investment manager's decisions?
What is the goal of performance attribution? - Answers :To determine if the manager
added alpha (beating the benchmark) by selecting active weights or by selecting
investments within the sectors
What is a mutual fund wholesaler? - Answers :The sales rep for a given mutual fund
What is the allocation effect? - Answers :Measures the active weight difference between
the sector allocation for an investment and the sector allocation for their benchmark,
then is multiplied by the sector active return which is the difference between the return
earned by the sector benchmark and the return earned by the total benchmark
What is W(p)? - Answers :A portfolio's sector allocation
What is W(sb)? - Answers :The sector allocation of the benchmark
What is R(sb)? - Answers :The return earned by the sector benchmark
