Reading 43: Evaluating Portfol....rmance－LOS q,(Part 1) contrast

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 16: Performance Evaluation and Attribution
Reading 43: Evaluating Portfolio Performance
LOS q, (Part 1): Compare and contrast the information ratio, Treynor measure, and Sharpe ratio.

[此贴子已经被作者于2008-9-17 18:35:07编辑过]

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The Information ratio is also referred to as the benefit-cost ratio. What is cost defined as?

A) The standard deviation of portfolio returns.

B) The standard deviation of surplus returns.

C) The standard deviation of benchmark returns.

D) The beta of the portfolio.

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Answer and Explanation

The information ratio is calculated as the surplus return divided by the standard deviation of surplus returns. The cost in the information ratio is the standard deviation of surplus returns.

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The Information ratio is also referred to as the benefit-cost ratio. What is cost defined as?

A) The standard deviation of portfolio returns.

B) The standard deviation of benchmark returns.

C) The beta of the portfolio.

D) The standard deviation of surplus returns.

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Answer and Explanation

The information ratio is calculated as the surplus return divided by the standard deviation of surplus returns. The cost in the information ratio is the standard deviation of surplus returns.

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Jack Gallon is a portfolio manager whose fund sponsor would like to evaluate his performance. It is very important to the fund sponsor to minimize tracking risk. Which of the following would be most appropriate for evaluating his performance?

A) The Sharpe ratio.

B) The information ratio.

C) The Treynor ratio.

D) Jensens alpha.

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Answer and Explanation

The information ratio is the managers excess return (relative to a benchmark return) divided by the standard deviation of excess returns. Because it measures risk and return relative to a benchmark, it would be the most appropriate measure when the minimization of tracking risk is important.

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Jim Kyle has been the manager of the Superior Asset Portfolio for the past ten years. During this time, Superiors average return was 14.50 percent. For the purpose of performance evaluation, the Superior Asset Portfolio is compared to the S& 500. During the same time period, the S& 500 had an average annual return of 18 percent. The standard deviation of surplus return is 23 percent. What is Superiors information ratio?

A) -0.56.

B) 0.45.

C) 0.16.

D) 0.15.

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Answer and Explanation

Information ratio = IR_j = SR_j / σ_SR = (14.50 - 18) / 23 = -0.15