CEBS RPA 2 EXAM
Caveats to performance measurement system - ANSWERS-1. A
hastily chosen system, poorly related to real needs, can rapidly
degenerate into a mechanistic, pointless exercise.
2. System should fit the investment objectives.
3. Measuring the process may alter it.
4. To save time and cost, overmeasurement be avoided.
Internal rate of return - ANSWERS-Allows the sponsor to determine
whether the investment is achieving the rate of return assumed for
actuarial calculations. Largely ineffective as a means of evaluating
investment managers because it is contaminated by the effects of the
timing of investments and withdrawals.
Time weighted rate of return - ANSWERS-Computed by dividing the
time interval under study into subintervals whose boundaries are the
dates of cash flows into and out of the fund and by computing the
internal rate of return for each subinterval. The geometric average for
the rates for these subintervals, with each rate having a weight
proportional to the length of time in its corresponding subinterval.
Capital Asset Pricing Model - ANSWERS-Uses standard statistical
techniques simple linear regression to analyze the relationship
between the periodic returns of the portfolio and those of the market.
,Portfolio's Alpha Value - ANSWERS-the level of return contributed
because of the skill of the investment manager that is managing the
portfolio
Portfolio's Beta Value - ANSWERS-the slope of the line measured as
the change in vertical movement per unit of change in the horizontal
movement. This represents the average return on the portfolio per 1%
return on the market.
Risk adjusted rate of return in portfolio measurement - ANSWERS-
can be used to measure risk-adjusted performance and to compare
portfolios with different risk levels developed by actual portfolio
decisions.
U.S. Treasury bills - ANSWERS-Treasury bills have maturities at
issue ranging from 91 to 360 days. There is almost no default risk on
these investments.
U.S. Treasury notes - ANSWERS-Treasury notes have initial
maturities ranging from one to five years. There is almost no default
risk on these investments.
Federal agency issues - ANSWERS-Other agencies issue short-term
obligations that range in maturity from one month to over ten years.
These instruments typically will yield slightly more than Treasury
obligations with a similar maturity.
, Certificates of deposit - ANSWERS-Issued by commercial banks and
have a fixed maturity, generally in the range of 90 days to one year.
The ability to sell a certificate of deposit prior to maturity usually
depends on its denomination. The default risk for these certificates
depends on the issuing bank, but it is usually quite small.
Commercial paper - ANSWERS-An unsecured short-term note of a
large corporation. This investment offers maturities that range up to
270 days, but the marketability is somewhat limited if an early sale is
required. The default risk depends on the credit standing of the issuer,
but commensurately higher yield is available.
Money market mutual funds - ANSWERS-Invest in U.S. Treasury
bills, federal agency issues, certificates of deposit, or commercial
paper. Investors achieve a yield almost as high as that paid by the
direct investments and benefit from the diversification of any default
risk over a much larger pool of investments.
Bonds in pension porfolios - ANSWERS-For pension plans with fixed
dollar obligations that will be paid out several years in the future,
purchase assets that will generate a cash flow similar to the benefit
payments.
The investment manager may purchase assets with a longer maturity
than the money market instruments described above.
Types of common stocks - ANSWERS-1. blue chip
2. growth
3. income
Caveats to performance measurement system - ANSWERS-1. A
hastily chosen system, poorly related to real needs, can rapidly
degenerate into a mechanistic, pointless exercise.
2. System should fit the investment objectives.
3. Measuring the process may alter it.
4. To save time and cost, overmeasurement be avoided.
Internal rate of return - ANSWERS-Allows the sponsor to determine
whether the investment is achieving the rate of return assumed for
actuarial calculations. Largely ineffective as a means of evaluating
investment managers because it is contaminated by the effects of the
timing of investments and withdrawals.
Time weighted rate of return - ANSWERS-Computed by dividing the
time interval under study into subintervals whose boundaries are the
dates of cash flows into and out of the fund and by computing the
internal rate of return for each subinterval. The geometric average for
the rates for these subintervals, with each rate having a weight
proportional to the length of time in its corresponding subinterval.
Capital Asset Pricing Model - ANSWERS-Uses standard statistical
techniques simple linear regression to analyze the relationship
between the periodic returns of the portfolio and those of the market.
,Portfolio's Alpha Value - ANSWERS-the level of return contributed
because of the skill of the investment manager that is managing the
portfolio
Portfolio's Beta Value - ANSWERS-the slope of the line measured as
the change in vertical movement per unit of change in the horizontal
movement. This represents the average return on the portfolio per 1%
return on the market.
Risk adjusted rate of return in portfolio measurement - ANSWERS-
can be used to measure risk-adjusted performance and to compare
portfolios with different risk levels developed by actual portfolio
decisions.
U.S. Treasury bills - ANSWERS-Treasury bills have maturities at
issue ranging from 91 to 360 days. There is almost no default risk on
these investments.
U.S. Treasury notes - ANSWERS-Treasury notes have initial
maturities ranging from one to five years. There is almost no default
risk on these investments.
Federal agency issues - ANSWERS-Other agencies issue short-term
obligations that range in maturity from one month to over ten years.
These instruments typically will yield slightly more than Treasury
obligations with a similar maturity.
, Certificates of deposit - ANSWERS-Issued by commercial banks and
have a fixed maturity, generally in the range of 90 days to one year.
The ability to sell a certificate of deposit prior to maturity usually
depends on its denomination. The default risk for these certificates
depends on the issuing bank, but it is usually quite small.
Commercial paper - ANSWERS-An unsecured short-term note of a
large corporation. This investment offers maturities that range up to
270 days, but the marketability is somewhat limited if an early sale is
required. The default risk depends on the credit standing of the issuer,
but commensurately higher yield is available.
Money market mutual funds - ANSWERS-Invest in U.S. Treasury
bills, federal agency issues, certificates of deposit, or commercial
paper. Investors achieve a yield almost as high as that paid by the
direct investments and benefit from the diversification of any default
risk over a much larger pool of investments.
Bonds in pension porfolios - ANSWERS-For pension plans with fixed
dollar obligations that will be paid out several years in the future,
purchase assets that will generate a cash flow similar to the benefit
payments.
The investment manager may purchase assets with a longer maturity
than the money market instruments described above.
Types of common stocks - ANSWERS-1. blue chip
2. growth
3. income
