The spreadsheet


1.       The spreadsheet Week1_Quiz_Q1 has monthly (end of month) data for an investment fund. The second column has the cash flows from clients. Assume such cash flows occur just before the end of each month. Note the fund is created on Dec 31 2011 with a cash inflow of 10,000. The last column has a Total Return Index for the Russell 3000.

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a.        What is the dollar-weighted average return of the fund? (monthly and annualized)

b.       What is the time-weighted average return of the fund? (monthly and annualized)

c.        Which one, a) or b), more accurately measures the performance of fund managers? Why?

d.       What is the Sharpe Ratio of fund (monthly and annualized)?

e.        What is the CAPM alpha of the fund (monthly and annualized). Assume the risk-free rate is equal to zero throughout the entire period, and that the Russell 3000 index is the Market Portfolio.

f.         What is the Information Ratio of the fund? (monthly and annualized). Assume the Russell 3000 is the benchmark.

g.        What is the Maximum Draw Down of the fund?

h.       Are fund managers doing a good job?


1.       Active portfolio management presupposes market inefficiency.

a.        Explain why, as a matter of pure logic, stock markets cannot be fully efficient.

b.       Describe two real world situations in which stock prices were clearly wrong.

c.        What are the two complementary causes of stock market inefficiency?

d.       According to Daniel Kahneman, what is the ultimate source of behavioral biases?

e.        Explain why arbitrage activity is limited and therefore stock mispricings are not fully and instantly corrected even if real-world “sharks” spot them.

f.         How do Quantitative Investors go about trying to exploit stock market inefficiency?

g.        What are reasonable expectations for Quantitative Investing?

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