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Introduction for the MFM Orientation - page 9 / 14

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Active Return

It may be important to assess the “added value” of an investment manager. Two approaches to this are:

relative to a benchmark an index can be interpreted as a portfolio the relative return can therefore be expressed as the sum of the contributions for the each relative overweight and underweight

r r=

(w

w )·r

to which one can apply various statistical measures, such as the information ratio relative to static weights this is a newer concept appropriate for hedge funds the manager should increase (decrease) weights in holdings that subsequently outperform (underperform)

E [r] =

E [w ] · E [r ] +

cov [w r ]

Measurement Concepts for Banking Trading and Investing

John Dodson

Introduction

Outline

Financial Accounting

Double-Entry Bookkeeping

Financial Statements

Investment Accounting

Performance Measurement

Active Return

Securities Conventions

Trading Terminology

Cases

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