Study Guide

dollar-weighted return – a method of measuring the performance of a portfolio during a particular period of time. It is the discount rate that makes the present value of cash flows into and out of the portfolio, as wells as the portfolio’s ending value, equal to the portfolios beginning value.

time-weighted return – method of measuring the performance of a portfolio over a period of time. Effectively, it is the return on one dollar invested in the portfolio at the beginning of the time period.

value-weighted index - Market index in which the contribution of a security to the value of the index is a function of the security’s market capitalization aggregate market value of stocks in index on date t, i.e., market capitalization, typically based on number of“freely floating” outstanding shares (i.e., excluding shares closely held by other companies, control groups, or government agencies) Iv(t) = [MV(t)/MV(0)]*Iv(0)
Equivalently,
Iv(t) = MV(t)/DIVISOR v where: DIVISOR v = MV(0)/Iv(0)

price-weighted index – market index in which the contribution of a security to the value of the index is a function of the security’s current market price. Ip(t) = [SUMP(t)/SUMP(0)]*Ip(0) where: SUMP(t) = sum of stock prices of stocks in index on date t
Ip(0) = value used to ‘standardize’ index
Equivalently,
Ip(t) = SUMP(t)/DIVISORp where: DIVISORp = SUMP(0)/Ip(0)

attribution analysis - determines the performance of the active return and how well assets were allocated and securities selected.
Identifies sources of portfolio’s tracking error return (ter)
– Sometimes know as the portfolio’s ‘active return’
– Conducted for a given time period such as a month
– It “explains” ter = rp - r b for the given time period
• rp is return on portfolio
• r b is return on benchmark index
– Utilized to see where the portfolio manager is “adding value” for that period
– Involves decomposing the portfolio into sectors
Allocation
• Did manager overweight sectors