CEBS RPA
2
1.Types of investment risk: Purchasing power, business, interest rate, market, specific
2.purchasing power risk: reflects the relationship between the nominal rate of return on an investment and the increase in the
rate of inflation
3.Business risk: the prospect of the corporation issuing the security suffering a decline in earnings power that would adversely
affect its ability to pay interest, principal or dividends.
4.Interest rate risk: the well-known inverse relationship between interest rates and (long-term) bond prices. That is to say,
when interest rates increase, the value of long-term bonds falls.
5.Market risk: an individual stock's reaction to a change in the market. In general, most stock prices will increase if the stock
market increases appreciably and decrease if the market decreases appreciably.
6.Risk measurement beta: the price of one stock may change half as fast as the market, on average, while another may
change twice as fast. This relationship is quantified by a measure known as beta. 7. Specific risk: risk that is intrinsic to a
particular firm
8. Tax aspect of an investment importance: Because of the tax-exempt status of the pension fund. Investment income of
qualified retirement plans is tax-exempt, so certain types of investments may not be as attractive to pension funds as they
would be for other types of investors.
9. Liquidity: refers to the ability to convert an investment into cash in a short time period with little, if any, loss in principal.
10. Steps for effective performance measurement: Definition. Input. Processing. Output
11. Performance Measurement definition: Establishment of investment objectives and, to the extent practical, a clearly
formulated portfolio strategy
12. Performance Measurement Input: Availability of reliable and timely data. Incorrect and tardy data will render the most
sophisticated system ineffective.
13. Performance Measurement Processing: Use of appropriate statistical methods to produce
relevant measurements. The complex interaction of objectives, strategies and managers' tactics cannot be understood if
inappropriate statistical methods are used.
14. Performance Measurement Output: Analysis of the process and results presented in a useful
format. Presentation should relate realized performance to objectives and pre-established standards. Enough material should
be available to understand and analyze the process.
15. Caveats to performance measurement system: 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.
16. Internal rate of return: 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.
17. Time weighted rate of return: 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.
18. Capital Asset Pricing Model: Uses standard statistical techniques simple linear regression to analyze the relationship
between the periodic returns of the portfolio and those of the market.
19. Portfolio's Alpha Value: the level of return contributed because of the skill of the investment manager that is managing
the portfolio
20. Portfolio's Beta Value: 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.
21. Risk adjusted rate of return in portfolio measurement: can be used to measure
risk-adjusted performance and to compare portfolios with different risk levels developed by actual portfolio decisions.
22. U.S. Treasury bills: Treasury bills have maturities at issue ranging from 91 to 360 days. There is almost no default risk
on these investments.
23. U.S. Treasury notes: Treasury notes have initial maturities ranging from one to five years. There is almost no default risk
on these investments.
24. Federal agency issues: 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.
25. Certificates of deposit: 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.
26. Commercial paper: 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.
27 Money market mutual funds: 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.
2
1.Types of investment risk: Purchasing power, business, interest rate, market, specific
2.purchasing power risk: reflects the relationship between the nominal rate of return on an investment and the increase in the
rate of inflation
3.Business risk: the prospect of the corporation issuing the security suffering a decline in earnings power that would adversely
affect its ability to pay interest, principal or dividends.
4.Interest rate risk: the well-known inverse relationship between interest rates and (long-term) bond prices. That is to say,
when interest rates increase, the value of long-term bonds falls.
5.Market risk: an individual stock's reaction to a change in the market. In general, most stock prices will increase if the stock
market increases appreciably and decrease if the market decreases appreciably.
6.Risk measurement beta: the price of one stock may change half as fast as the market, on average, while another may
change twice as fast. This relationship is quantified by a measure known as beta. 7. Specific risk: risk that is intrinsic to a
particular firm
8. Tax aspect of an investment importance: Because of the tax-exempt status of the pension fund. Investment income of
qualified retirement plans is tax-exempt, so certain types of investments may not be as attractive to pension funds as they
would be for other types of investors.
9. Liquidity: refers to the ability to convert an investment into cash in a short time period with little, if any, loss in principal.
10. Steps for effective performance measurement: Definition. Input. Processing. Output
11. Performance Measurement definition: Establishment of investment objectives and, to the extent practical, a clearly
formulated portfolio strategy
12. Performance Measurement Input: Availability of reliable and timely data. Incorrect and tardy data will render the most
sophisticated system ineffective.
13. Performance Measurement Processing: Use of appropriate statistical methods to produce
relevant measurements. The complex interaction of objectives, strategies and managers' tactics cannot be understood if
inappropriate statistical methods are used.
14. Performance Measurement Output: Analysis of the process and results presented in a useful
format. Presentation should relate realized performance to objectives and pre-established standards. Enough material should
be available to understand and analyze the process.
15. Caveats to performance measurement system: 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.
16. Internal rate of return: 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.
17. Time weighted rate of return: 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.
18. Capital Asset Pricing Model: Uses standard statistical techniques simple linear regression to analyze the relationship
between the periodic returns of the portfolio and those of the market.
19. Portfolio's Alpha Value: the level of return contributed because of the skill of the investment manager that is managing
the portfolio
20. Portfolio's Beta Value: 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.
21. Risk adjusted rate of return in portfolio measurement: can be used to measure
risk-adjusted performance and to compare portfolios with different risk levels developed by actual portfolio decisions.
22. U.S. Treasury bills: Treasury bills have maturities at issue ranging from 91 to 360 days. There is almost no default risk
on these investments.
23. U.S. Treasury notes: Treasury notes have initial maturities ranging from one to five years. There is almost no default risk
on these investments.
24. Federal agency issues: 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.
25. Certificates of deposit: 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.
26. Commercial paper: 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.
27 Money market mutual funds: 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.
