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CFA Level III Updated
How do Sharpe ratio, Treynor ratio, and information ratio differ as risk-adjusted performance measures?
All three ratios measure risk-adjusted performance, but they differ in what risk they measure and what return they evaluate. Understanding when each is appropriate is critical for the CFA Level III exam.
What is home bias and what behavioral factors drive it?
Home bias is over-allocation to domestic assets relative to global market weights. Partly rational (currency, info, taxes), mostly behavioral (familiarity, ambiguity aversion, patriotism).
What makes a benchmark valid for performance evaluation and what are the key properties a good benchmark must have?
Benchmark selection is foundational to performance evaluation because a poorly chosen benchmark makes all subsequent analysis meaningless. The CFA Level III curriculum identifies seven key properties of a valid benchmark.
How do you decompose alpha to distinguish genuine manager skill from luck and factor exposure?
Alpha decomposition is the process of separating a manager's excess return into its component sources to determine how much (if any) represents genuine investment skill. The key insight is that not all alpha is created equal.
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