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R02 Measuring investment performance: free practice questions

5 free questions on Measuring investment performance, part of learning outcome 9 (Investment performance). Pick an answer to check it, or open the answer to see why each option is right or wrong.

  1. Question 1 of 5

    Which of the following are reasons it's important to know how investments and portfolios have performed? 1. Understanding investment markets generally 2. Assessing the competence of fund managers 3. Rewarding investment managers 4. Charging performance-related fees

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    The answer is B: 1, 2, 3 and 4

    Performance information is essential for understanding markets, assessing managers, in many cases rewarding them, and charging any performance-related fees.

    Why the other options are wrong

    A
    Performance data is also used to reward managers and charge performance fees.
    C
    It's also used for performance-related fees.
    D
    It also helps in understanding markets generally.

  2. Question 2 of 5

    Which of the following are disadvantages of using the holding period return to compare two investments? 1. Returns over different periods must be annualised first 2. It doesn't adjust for the timing of cash flows 3. It doesn't allow for the compounding of returns 4. It ignores any income received

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    The answer is B: 1, 2 and 3 only

    The HPR can be measured over any period, so comparisons need the same period or annualised figures. It doesn't adjust for cash flow timing or compounding, though it includes income.

    Why the other options are wrong

    A
    It does include income; the period mismatch is a problem.
    C
    It also ignores compounding.
    D
    Statement 4 is wrong: income is included.

  3. Question 3 of 5

    A manager receives £2m. After six months it's worth £2.2m, and the client adds £0.3m. At the year end it's worth £2.75m. Which of the following statements are correct? 1. The TWR is 21.00% 2. The MWR is about 20.93% 3. The TWR is the better measure for comparing this manager with others 4. The MWR is unaffected by the client's extra investment

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    The answer is A: 1, 2 and 3 only

    TWR: r1 = 10%, r2 = 2.75 ÷ 2.5 − 1 = 10%, so 1.1 × 1.1 − 1 = 21%. MWR = (2.75 − 2 − 0.3) ÷ (2 + 0.3 × 6/12) = 0.45 ÷ 2.15 = 20.93%. The TWR isn't distorted by cash flows.

    Why the other options are wrong

    B
    The MWR is affected by the cash flow; the TWR is 21%.
    C
    The MWR of about 20.93% is also correct.
    D
    The MWR is influenced by the timing of new money.

  4. Question 4 of 5

    What does a negative Sharpe ratio indicate?

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    The answer is D: A risk-free asset would have done better

    A negative Sharpe ratio means the return was below the risk-free rate, so a risk-free asset would have performed better.

    Why the other options are wrong

    A
    Sharpe compares with the risk-free rate, not a benchmark.
    B
    A negative ratio suggests the opposite.
    C
    Zero volatility would make the ratio undefined, not negative.

  5. Question 5 of 5

    A fund returned 10.5% against a benchmark return of 8%, with a tracking error of 5%. What is its information ratio?

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    The answer is A: 0.50

    Information ratio = (10.5% − 8%) ÷ 5% = 2.5 ÷ 5 = 0.50.

    Why the other options are wrong

    B
    That's the relative return, not divided by tracking error.
    C
    That divides tracking error by the relative return.
    D
    That divides the fund return, not the relative return, by tracking error.

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