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LOS c: Calculate, interpret, and contrast time-weighted and money-weighted rates of return and discuss how each is affected by cash contributions and withdrawals.
Q1. One limitation of the money-weighted return is the fact that it:
A) penalizes managers for cash flows that occur outside of their control.
B) computes the return independent of the cash flows.
C) requires computations every time a cash flow occurs.
Q2. One limitation of the time-weighted return is the fact that it:
A) requires the computation of the internal rate of return every time a cash flow occurs.
B) penalizes managers for cash flows that occur outside of their control.
C) requires computations every time a cash flow occurs.
Q3. Pension Advisors, Inc. (PAI), has been asked by Efficient Industries (Efficient) to evaluate the pension fund's bond managers. Efficient is currently using Alpha Fixed Income Management (Alpha) and Beta Bond Advisors (Beta). Efficient hired Alpha on the basis of its proprietary rate anticipation model. Beta was engaged because of its fundamental analysis process for identifying undervalued securities.
Bond returns over the trailing one-year period have been unusually robust due to a series of aggressive rate cuts by the Federal Reserve. The trustees are concerned that the managers may have strayed from their stated investment processes in an attempt to capitalize on the extraordinary economic and monetary environment.
Art Gunnlow, a PAI analyst, has been assigned the task of reviewing the data and preparing a report for Efficient. Gunnlow has assembled the following quarterly returns for Alpha and Beta:
|
Quarter |
Alpha Return |
Beta Return |
|
1 |
4.63% |
1.95% |
|
2 |
0.89% |
1.15% |
|
3 |
7.38% |
2.07% |
|
4 |
1.35% |
1.45% |
Alpha's trailing return was 1.38% in excess of its market portfolio benchmark, while Beta's return was 0.53% in excess of its corresponding index benchmark.
What are Alpha's time-weighted quarterly average and annualized returns, respectively, for the one-year period?
Quarterly Annual
A) 1.654% 6.783%
B) 3.529% 6.783%
C) 3.529% 14.881%
Q4. What are Beta's time-weighted quarterly average and annualized returns, respectively, for the one-year period?
Quarterly Annual
A) 3.529% 14.882%
B) 1.654% 6.783%
C) 1.654% 3.529%
Q5. Which of the following least accurately characterizes the time-weighted return? The time-weighted return:
A) can be expensive and error prone.
B) is most appropriate for a manager who cannot control the timing of the cash flows in and out of the fund.
C) is similar to the internal rate of return.
Q6. For a global portfolio, the money-weighted returns for the four quarters of last year are: 3%, -2%, 5%, and 2.5%. The corresponding time-weighted returns are: 2.5%, -1%, 4%, and 3.5%. What would an investor report as the annual rate of return on the portfolio?
A) 9.23%.
B) 9.0%.
C) 8.64%.
Q7. What is the major difference between the money-weighted and time-weighted rate of return? The money-weighted return:
A) computes the return more precisely using the internal rate of return computation while time-weighted return computation is an approximation.
B) is averaged across periods to arrive at an annual rate of return while the time-weighted return is compounded across periods to arrive at an annual rate of return.
C) penalizes managers for cash flows that occur outside of their control while the time-weighted return does not.
Q8. The time-weighted return measures the:
A) return on the average investment during the period.
B) total return during the period.
C) return per unit of domestic currency.
Q9. The money-weighted return measures the:
A) total return during the period.
B) return per unit of domestic currency.
C) return on the average investment during the period.
Q10. Mary Johnson and Jane Meinrod are analysts with Alpha Systems. Alpha provides consulting services to portfolio managers, mutual funds, and defined benefit pension plans. Alpha’s main service is performance measurement and attribution. Alpha has provided this service to managers worldwide for more than eleven years.
Johnson and Meinrod are discussing the performance of Frank Weinstein. Weinstein is a portfolio manager who caters to wealthy clients in the suburbs of Atlanta. Many of his clients are quite anxious over the recent downturn in the stock market and have been selling stocks as the market has declined. Conversely, a small minority of clients have been buying on the dips in the market, thereby increasing their exposure to stocks as the market has declined. Many of Weinstein’s clients are quite wealthy and have over ten million dollars entrusted to him. Weinstein would like his clients to pursue a more long-term trading strategy to reduce transactions costs. However, because of their substantial wealth, he does not feel that he can object too strongly to their demands for short-term trading. Johnson states that Weinstein’s performance should be evaluated using a money-weighted return as this would be the best gauge of his performance. Meinrod replies that the use of the money-weighted return would be less expensive than using a time-weighted return.
Weinstein would like Johnson and Meinrod to evaluate the performance of one of his largest clients, Thomas Franklin. The records for the Franklin portfolio show the following: on August 1, the portfolio was valued at $18,600,000, and on August 16, Franklin contributed $5,000,000 to the portfolio. After that contribution, the portfolio was valued at $26,200,000. On August 31, the account was valued at $19,400,000. Johnson reports that this account contains quite a few fixed-income securities and that this will increase the difficulty in valuing this account. Meinrod states that a “nexus” approach can be used to deal with any difficulties encountered in valuing fixed income securities.
Johnson and Meinrod are also evaluating the performance of Cutter Mutual Fund. Cutter specializes in investing in small cap stocks from various markets in the Pacific basin. Because funds with an investment objective like Cutter’s are somewhat uncommon, Cuter has had difficulty constructing a valid benchmark. While discussing the properties of a valid benchmark, Johnson asserts that a benchmark should be investable, referring to the ability of the manager to replicate the securities in the benchmark. Meinrod responds that a benchmark should also reflect current investment opinion, by which she means that the benchmark should be invested in securities that most managers would agree are attractive purchases.
Having settled on a valid benchmark for the Cutter Fund, Johnson and Meinrod gather the following performance statistics for the fund, the benchmark, and a market index:
|
Cutter portfolio return |
4.90% |
|
Benchmark return |
5.20% |
|
Market index return |
4.10% |
Regarding the analysts’ statements concerning the use of the money-weighted return and the time-weighted return for Weinstein portfolio:
A) both analysts are incorrect.
B) Johnson is incorrect, and Meinrod is correct.
C) both analysts are correct. | 
发表于 2009-4-10 13:23
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