Question

Vandelay Marketing, an advertising firm specializing in the financial services industry, has just hired you. You were a finance major in college and are a candidate for the CFA program. You were hired to provide the firm with more depth in the are of investment performance analysis.

Vandelay is preparing advertising for information for Falcon Funds Limited. Falcon has provided the following five-year annual return data, where year 5 is the most recent period:

Falcon Funds

Year 1 2 3 4 5

Return (%) -10 25 -5 30 5

To assess your understanding of returns, your supervisor asks you to calculate a number of different returns, including arithmetic, geometric, annualized, and money- (dollar-) weighted returns. Your supervisor also asks you to determine the impact of the following cash flow scenarios on Falcon’s returns:

Cash Flows Scenario 1 Scenario 2 Scenario 3

Beginning Market Value . $100 . $100 $100

End of year 2 deposit (withdrawal) $0 . $20 . ( $-10)

What is Falcon’s geometric average return over the five-year period?

What are Falcon’s money- (dollar-) weighted average returns over the five-year period for Scenarios 2 and 3?

You have determined that the average monthly return for another Vandelay client was 1.63% during the past year. What is the annualized rate of return?

The return calculation method most appropriate for evaluating the performance of a portfolio manager is?

Answer 1