AWMA – Wealth Management, Portfolio Theory, Risk, Tax & Estate Planning
Study Guide
Capital Market Line - correct answer ✔✔A graphical representation of the relationship between
risk and return, where risk is measured by standard deviation; the CML includes the concept of
a risk-free rate of return
Jenson Performance index - correct answer ✔✔Used in comparing performance money
managers on a risk-adjusted basis and can be used by itself. A number above 0.00 indicates the
manager had better performance than would be expected given the risk he took... vice versa
How are Treynor and Sharpe indexes best used? - correct answer ✔✔Both are used to compare
the risk - adjusted returns on diff funds. The higher the risk-adjusted return, the better. The key
diff is that Treynor uses Beta as its risk measure, so Treynor can only be used with fully
diversified portfolios. Sharpe, uses Standard deviation (total risk) as its measure of risk so can
only be used with either fully diversified or nondiversified portfolios
Benefits of Buy and hold - correct answer ✔✔returns at least as good as strategies based on
technical analysis, low transactional costs, the deferral of capital gains taxes on profits, not
missing the best days of the market
Property' value - correct answer ✔✔NOI/Cap Rate
Typical hedge fund fees - correct answer ✔✔annual management fee (typically around 2%),
most have incentive (performance) fee between 10 and 20% of the funds profits. The term "2
and 20" would refer to a 2% management fee and 20% profits going to hedge fund manager.
there can be a hurdle rate that the fund manager must surpass in order to earn a performance
fee. also can be a surrender fee when the fund is sold.
Major risk in hedge funds - correct answer ✔✔illiquidity, manager risk, investment strategy risk,
headline/regulatory risk, and the risk that there may be adverse tax consequences
Study Guide
Capital Market Line - correct answer ✔✔A graphical representation of the relationship between
risk and return, where risk is measured by standard deviation; the CML includes the concept of
a risk-free rate of return
Jenson Performance index - correct answer ✔✔Used in comparing performance money
managers on a risk-adjusted basis and can be used by itself. A number above 0.00 indicates the
manager had better performance than would be expected given the risk he took... vice versa
How are Treynor and Sharpe indexes best used? - correct answer ✔✔Both are used to compare
the risk - adjusted returns on diff funds. The higher the risk-adjusted return, the better. The key
diff is that Treynor uses Beta as its risk measure, so Treynor can only be used with fully
diversified portfolios. Sharpe, uses Standard deviation (total risk) as its measure of risk so can
only be used with either fully diversified or nondiversified portfolios
Benefits of Buy and hold - correct answer ✔✔returns at least as good as strategies based on
technical analysis, low transactional costs, the deferral of capital gains taxes on profits, not
missing the best days of the market
Property' value - correct answer ✔✔NOI/Cap Rate
Typical hedge fund fees - correct answer ✔✔annual management fee (typically around 2%),
most have incentive (performance) fee between 10 and 20% of the funds profits. The term "2
and 20" would refer to a 2% management fee and 20% profits going to hedge fund manager.
there can be a hurdle rate that the fund manager must surpass in order to earn a performance
fee. also can be a surrender fee when the fund is sold.
Major risk in hedge funds - correct answer ✔✔illiquidity, manager risk, investment strategy risk,
headline/regulatory risk, and the risk that there may be adverse tax consequences
