PCT

Global investment in responsible strategies

$30 trillion

Percentage of advisers discussing ESG

40%

Deadline for mandatory TCFD reporting in the UK

2025

Purpose of the UK Green Taxonomy

To standardize definitions of 'environmentally sustainable' economic activities and help drive capital into green activities.

Sustainable Disclosure Requirements (SDR) initiative

A framework requiring UK asset managers to disclose sustainability-linked metrics.

Three main approaches to ESG investing

ESG integration, exclusionary screening, thematic investing.

Exclusionary or negative screening

Avoiding investments in companies engaged in certain industries like fossil fuels, tobacco, or weapons.

Impact investing

Investing in companies that aim for measurable social or environmental impact alongside financial returns.

Percentage of investors engaging with pension for social impact

53%

Top five global risks in ESG research

Climate action failure, extreme weather, biodiversity loss, natural disasters, and human environmental damage.

Global climate finance for adaptation in 2021/2022

$63 billion

Common financial instruments in ESG financing

Project-level market rate debt ($561 billion) and equity financing ($368 billion).

Difference between ESG investing and ethical investing

Ethical investing excludes companies based on moral values, while ESG investing integrates environmental, social, and governance factors into financial decisions.

Climate compromise in ESG portfolio diversification

A balance between mitigating climate risks and capturing financial opportunities.

Ways to implement ESG

Active ownership, capital allocation, and impact investing.

Three climate-related risk scenarios

Business as usual (BAU), Disorderly transition, and Paris-aligned transition.

Expected rise in carbon prices by 2050

Around $400 per tonne.

Three key climate pathways

Paris Orderly Pathway, Paris Disorderly Pathway, Failed Transition Pathway.

USS's Net Zero target year

2050

USS's emissions reduction target for 2030

50% reduction in corporate asset emissions.

Factors influencing a company's ESG score

Environmental impact, governance quality, social responsibility, and transparency.

Three ESG metrics used for analysis

Carbon footprint, Board diversity, Business ethics compliance.

What is Alpha in portfolio performance evaluation?

A measure of active return (excess return over benchmark).

What is the equation for Alpha?

Alpha = Portfolio Return - [Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)]

What is Jensen's Alpha?

Risk-adjusted excess return of a portfolio compared to a benchmark.

What is the equation for Jensen's Alpha?

Jensen's Alpha = Portfolio Return - [Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)]

What does Beta represent in portfolio analysis?

A measure of systematic risk; Beta >1 means higher risk than market.

What is the equation for Beta?

Beta = Covariance (Portfolio, Market) / Variance (Market)

What is R-squared (R^2) in portfolio analysis?

The percentage of a portfolio's movement explained by the benchmark.

What is the equation for R-Squared?

R^2 = (Correlation between Portfolio and Market)

What does the Sharpe Ratio measure?

Absolute return (above the risk-free rate) per unit of volatility.

What is the equation for the Sharpe Ratio?

Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Standard Deviation

What does the Information Ratio measure?

Relative return (vs. benchmark) per unit of relative risk (tracking error).

What is the equation for the Information Ratio?

Information Ratio = (Portfolio Return - Benchmark Return) / Tracking Error

What is the Treynor Ratio?

A measure of return relative to systematic risk (Beta).

What is the equation for the Treynor Ratio?

Treynor Ratio = (Portfolio Return - Risk-Free Rate) / Beta

What is the Sortino Ratio?

A measure of return per unit of downside deviation, focusing on negative risk.

What is the equation for the Sortino Ratio?

Sortino Ratio = (Portfolio Return - Risk-Free Rate) / Downside Deviation

What does the Appraisal Ratio assess?

Fund's alpha compared to unsystematic risk.

What is the equation for the Appraisal Ratio?

Appraisal Ratio = Alpha / Standard Deviation of Residual Risk

What is the Total Expense Ratio (TER) or Ongoing Charge Figure (OCF)?

A measure of total cost of investing in a fund, excluding transaction costs.

What are the two types of return measurement?

Time Weighted Return (TWR) and Money Weighted Return (MWR).

What is the key difference between TWR and MWR?

TWR is unaffected by cash flows; MWR is influenced by deposits/withdrawals.

What is Holding Period Return (HPR)?

Total return from income and asset appreciation over an investment period.

What is the equation for Holding Period Return?

HPR = (Income + End Value - Initial Value) / Initial Value

What is the formula for Annualized HPR?

Annualized HPR = (1+HPR)^(1/n) -1, where n = number of years.

What is the difference between Arithmetic and Geometric Average Return?

Arithmetic is a simple mean; Geometric accounts for compounding.

What is the equation for Arithmetic Average Return?

Arithmetic Average = (R1 + R2 + … + Rn) / n

What is the equation for Geometric Average Return?

Geometric Average = [(1+R1) * (1+R2) * … * (1+Rn)]^(1/n) -1

What is the impact of FX hedging on return?

Hedging removes FX risk via forward contracts.

What is the equation for Domestic Return considering FX?

Rdomestic = {(1+Rforeign) * (FXstart / FXend)} - 1

What are the key characteristics of a good benchmark?

Unambiguous, investable, measurable, appropriate, and specified in advance.

What is Peer Group Benchmarking?

Comparing portfolio performance against similar managed portfolios.

What is Customized Benchmarking?

Using market cap total return indices tailored to the portfolio’s characteristics.

What are the three components of Performance Attribution?

Asset Allocation, Security Selection, and Interaction Effect.

What is the Brinson-Hood-Beebower Attribution model?

A model breaking down portfolio return into allocation, selection, and interaction effects.

What did Paul Samuelson argue about market efficiency?

Markets are micro-efficient but macro-inefficient, favoring asset allocation over selection.

Question

Answer

What is Alpha in simple terms?

It shows how much better (or worse) a fund did compared to the market.

How can you think of the Alpha equation?

Alpha = Extra profit made beyond what was expected based on market movements.

What is Jensen's Alpha in simple terms?

It tells if a fund manager made smart decisions by adjusting for risk.

How can you think of the Jensen's Alpha equation?

Jensen's Alpha = Extra return after considering market risk and the risk-free rate.

What is Beta in simple terms?

It shows how much a stock or fund moves compared to the market.

How can you think of the Beta equation?

Beta = If higher than 1, the stock is more risky than the market; if lower, it's safer.

What is R-squared in simple terms?

It tells how well a fund's performance is explained by the market.

How can you think of the R-Squared equation?

R^2 = A high number (close to 1) means the fund follows the market closely.

What is the Sharpe Ratio in simple terms?

It measures how much extra return you get for the risk you're taking.

How can you think of the Sharpe Ratio equation?

Sharpe Ratio = Higher is better, as it means you're earning more per unit of risk.

What is the Information Ratio in simple terms?

It tells if a manager is adding value beyond a benchmark.

How can you think of the Information Ratio equation?

Information Ratio = The higher, the better the manager's skill in beating the market.

What is the Treynor Ratio in simple terms?

It shows how much return you got per unit of market risk (Beta).

How can you think of the Treynor Ratio equation?

Treynor Ratio = Higher means more return for each unit of risk taken.

What is the Sortino Ratio in simple terms?

It measures return but only looks at downside (bad) risk.

How can you think of the Sortino Ratio equation?

Sortino Ratio = A higher value means better performance with less bad risk.

What is the Appraisal Ratio in simple terms?

It compares extra return (Alpha) to the amount of risk taken.

How can you think of the Appraisal Ratio equation?

Appraisal Ratio = Higher means the manager is generating strong returns efficiently.

What is Holding Period Return in simple terms?

It measures how much you earned on an investment over time.

How can you think of the HPR equation?

HPR = (Profit + Any Income) / Initial Investment.

What is Annualized HPR in simple terms?

It adjusts your total return to show what it would be per year.

How can you think of the Annualized HPR equation?

Annualized HPR = Helps compare returns over different time periods.

What is Arithmetic Average Return in simple terms?

It's the simple average of multiple returns.

What is Geometric Average Return in simple terms?

It considers compounding, making it more accurate.

How can you think of Arithmetic vs Geometric Return?

Arithmetic is a rough estimate; Geometric is more precise for long-term returns.

What is FX Hedging in simple terms?

It protects against currency risk when investing abroad.

How can you think of the FX Hedging equation?

It locks in an exchange rate, so future currency changes don't impact returns.

What is Performance Attribution in simple terms?

It explains where your investment returns are coming from.

How can you think of Performance Attribution?

It separates return into what came from asset choice and what came from individual investments.

What is Asset Allocation in simple terms?

It's deciding how much money goes into different investment types (stocks, bonds, etc.).

What is Security Selection in simple terms?

It's picking the best individual stocks or bonds within each category.