Download - 11 Evaluating Portfolio Performance
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TestID:7427843EvaluatingPortfolioPerformance
Question#1of169 QuestionID:465743
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Question#2of169 QuestionID:465821
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Question#3of169 QuestionID:465861
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Whichofthefollowingisleastlikelytobeutilizedinmacroperformanceevaluation?
Beginningofperiodfundvaluations.
Externalcashflowsintothefund.
Puresectorallocationeffects.
Explanation
Puresectorallocationeffectsresultfrommicroperformanceevaluation.Theinputstomacroperformanceevaluationincludepolicyallocations,benchmarkportfolioreturns,fundreturns,fundvaluations,andexternalcashflows.
AnanalysthasgatheredthefollowinginformationabouttheperformanceofanequityfundandtheS&P500indexoverthesametime
period.
EquityFundS&P500
Return13%10.5%
StandardDeviation22%20%
Beta1.211.00
Riskfreerateis5.25%
TheTreynormeasurefortheequityfundis:
0.570.
0.064.
0.048.
Explanation
(0.130.0525)/1.21=0.064.
Whichofthefollowingmeasureswouldbethemostappropriateonetousewhencomparingtheresultsoftwoportfoliosinwhicheachportfoliocontainsmanystocksfromabroadselectionofdifferentindustries?
Informationratio.
Sharperatio.
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Questions#46of169
Treynormeasure.
Explanation
Theequationsforthe3measuresareasfollows:
Treynormeasure=(R R )/Sharperatio=(R R )/
Informationratio=(R R )/( )Sincebothportfoliosarewelldiversifiedmostoftheirriskcomesfromsystematicriskorbetaandistiedtothegenerallevelofoverallriskinthemarket.InthiscasethebestmeasuretousewouldbetheTreynormeasuresincethisusesbetaorsystematicriskasthemeasureofrisk.TheSharperatiousesstandarddeviationasthemeasureofriskinthedenominatorandtheinformationratioisbesttousewhencomparingaportfoliotoabenchmark.
ThefollowingtablesummarizestheperformanceattributionanalysisfortwofixedincomemanagersoftheAshburtonFundfortheyearendingDecember31,2005:
AshleyAsset
Management
ThierryAsset
Management
BondPortfolio
Benchmark
Interestrateeffect
expected
0.48 0.48 0.48
Interestrateeffect
unexpected
0.64 0.64 0.64
Durationmanagement 0.22 0.11 0.00
Convexitymanagement 0.10 0.10 0.00
Yieldcurvechange
management
0.08 0.23 0.00
Sectormanagement 0.12 1.23 0.00
Bondselection
management
0.18 0.16 0.00
TradingActivity
management
0.07 0.10 0.00
TotalReturn 1.45 2.31 1.12
AshleyAssetManagementstatesthatitsstrategyistooutperformtheindexthroughactiveinterestratemanagementandbondselection.
ThierryAssetManagementstatesitspolicyistoimmunizeagainstinterestrateexposureandtoearnpositivecontributionfrombondselection.
P F P
P F P
P B PB
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Question#4of169 QuestionID:465789
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Question#5of169 QuestionID:465790
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Question#6of169 QuestionID:465791
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Thetwofundmanager'sactivemanagementprocesshasyieldedexcessreturnsoverthebenchmark.Howmuchoftheexcessperformanceisattributabletointerestratemanagementeffects?
AshleyAssetManagement ThierryAssetManagement
20bps2bps
8bps23bps
22bps11bps
Explanation
Theinterestratemanagementeffectisacombinationoftheimpactsof1)durationmanagement2)convexitymanagementand3)Yieldcurvechangemanagement.
Giventhedataintheabovetablecanthemanager'spositiveperformancebeattributedprimarilytotheirstatedmanagementobjectives?
AshleyAssetManagement ThierryAssetManagement
NoNo
YesYes
YesNo
Explanation
AshleyAssetManagementexceededthebenchmarkby33bps.Interestratemanagementhasadded20bps(22bps10bps+8bps)andbondselection18bps.Thisisatotalof38bps,whichismorethan100%oftheiroutperformance.
ThierryAssetManagementexceededthebenchmarkby119bps.Immunizationagainstinterestrateexposureadded2bpsandbondselectionreducedperformanceby16bpsanoverallimpactof14bps.ClearlyThierryAssetManagementdidnotaddcontributionthroughtheirstatedobjective,mostofitcamefromsectorselection!
Whichofthefollowingstatementsabouttheinterestrateeffectsontheperformanceofafixedincomeportfolioisleastaccurate?
Theoveralleffectrepresentstheperformanceofapassivedefaultfreebondportfolio.
TheexpectedreturnisthereturnfromtheontherunTreasuryspotratecurve.
Theexpectedreturnisthereturnfromimpliedforwardrates.
Explanation
Theexpectedreturnisthereturnimpliedbyforwardrates,nottheontherunTreasuryspotratecurve.Althoughtheforwardratesarederivedfromthespotrates,atwoyearspotrateisnotthesameastheexpectedforwardrateintwoyearstime.
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Question#7of169 QuestionID:465687
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Question#8of169 QuestionID:465820
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Whatisthegoalofperformanceappraisal?
Identificationofoverallriskandreturn.
Identificationofthesourcesofdifferencesbetweenportfolioandbenchmarkriskandreturn.
Interpretationofperformanceattribution.
Explanation
Performanceappraisalinvolvestheinterpretationofperformanceattribution.Ajudgmentismadeaboutmanager'sdecisionsandskill,inanefforttodifferentiatebetweenreturnsattributabletoluckandthoseattributabletoskill.
RobertMeznariscurrentlyemployedasaseniorsoftwarearchitectinalargeestablishedsoftwarecompany.Heis38yearsold,andhiscurrentsalaryis$80,000aftertax.Meznarrecentlysoldhisstock(acquiredthroughstockoptions)inanInternetstartupcompany.Theentireproceedsof$2millionisheldintreasurysecurities.
Meznariscurrentlymarriedwith3children.Heisconcernedwiththepotentialeducationalexpensesofhischildrenandwantstosetaside$500,000forhisfavoritecharitableorganization.Thefamilyneeds$150,000tomaintainitscurrentlifestyle.Theexpectedinflationrateis6%andMeznarpaysa20%taxrateonhisinvestmentincome.Meznardoessomeinvestmentresearchonhisown,isconfident,carefulandmethodical,andtriestoavoidextremevolatility.However,hehasastrongpreferenceforgood,brandnamecompanies.
JohnSnow,CFA,ofCapitalAssociateshasbeenforwardedthefileofMeznartosuggestanappropriateportfolio.Snowreliesheavilyonthefollowingforecasts,furnishedbythefirm,forlongtermreturnsfordifferentassetclasses.HehasalreadydevelopedthreepossibleportfoliosforMeznar.
AssetClass ReturnStandardDeviation
X Y Z
U.S.Stock 12.0% 16% 40% 30% 25%
NonU.S.Stocks 14.0 24% 0 15 25%
U.S.Corporatebonds 7.0 10% 60 15 0
MunicipalBonds 5.0 8% 0 20 25
REIT 14 14% 0 20 25
AssumetheexpectedstandarddeviationofX,Y,andZare10.74%,19%,and22%respectively.Iftheriskfreerateis5%,whataretheSharperatiomeasuresofportfolioX,YandZ?
X Y Z
0.83 0.55 0.46
0.37 0.29 0.28
3.46 1.52 1.09
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Question#9of169 QuestionID:465811
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Question#10of169 QuestionID:465723
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Question#11of169 QuestionID:465697
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Explanation
SharpeRatio=(ExpectedReturnRiskFreeRate)/StandardDeviation
PortfolioX:SharpeRatio=(0.090.05)/0.1074=0.372PortfolioY:SharpeRatio=(0.1050.05)/0.19=0.289PortfolioZ:SharpeRatio=(0.11250.05)/0.22=0.284
TheSharpeRatioiscorrectlydefinedasameasureofafund's:
excessreturnearnedcomparedtoitstotalrisk.
excessreturnearnedcomparedtoitssystematicrisk.
returnearnedcomparedtoitstotalrisk.
Explanation
TheSharperatioisdefinedasafund'sexcessreturn(fund'sreturnminustheriskfreerate)dividedbythetotalrisk(standarddeviation).
Customsecuritybasedbenchmarksreflectthemanager'sinvestmentuniverse,weightedtoreflectaparticularapproach.WhichofthefollowingisNOTanadvantageofthistypeofbenchmark?
Allowsfundsponsorstoeffectivelyallocateriskacrossinvestmentmanagementteams.
Itischeaptoconstructandeasytomaintain.
Itmeetsalltherequiredbenchmarkpropertiesandallofthebenchmarkvaliditycriteria.
Explanation
Amajordisadvantageofcustomsecuritybasedbenchmarksisthattheycanbeexpensivetoconstructandmaintain.Theotherstatementsareregardedtobeadvantagesofusingcustomsecuritybasedbenchmarks.
Foraglobalportfolio,themoneyweightedreturnsforthefourquartersoflastyearare:3%,2%,5%,and2.5%.Thecorrespondingtimeweightedreturnsare:2.5%,1%,4%,and3.5%.Whatwouldaninvestorreportastheannualrateofreturnontheportfolio?
9.23%.
8.64%.
9.0%.
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Questions#1213of169
Question#12of169 QuestionID:465753
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Question#13of169 QuestionID:465754
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Question#14of169 QuestionID:465738
Explanation
Forreportingpurposes,timeweightedreturnisreported.Annualreturn=1.0250.991.041.0351=0.0923or9.23%.
Ananalysthasgatheredthefollowingassetallocationsandreturns,includinganappropriatebenchmark,coveringthepasttwelvemonthsfortheTriadFund.
FundandBenchmarkWeights FundandBenchmarkReturns
AssetClass Fund Benchmark Fund Benchmark
Stock 0.65 0.50 17.00 13.80
Bonds 0.25 0.40 8.10 8.30
Cash 0.10 0.10 3.85 4.05
ThevalueaddedtotheTriadFundreturnsattributabletothepuresectorallocationeffectis:
0.83%.
0.54%.
0.16%.
Explanation
Attributabletothepuresectorallocationeffect:(0.650.50)(13.810.63)+(0.250.40)(8.310.63)+(0.100.10)(4.0510.63)=0.83%.
Thebenchmarkreturniscalculatedastheweightedaverageofindividualassetreturnsinthebenchmark:(.5x13.8)+(.4x8.3)+(.1x4.05)=10.63%
ThevalueaddedtotheTriadFundreturnsattributabletothewithinsectorselectioneffectis:
1.96%.
1.50%.
2.23%.
Explanation
Attributabletothewithinsectorselectioneffect:(0.5)(17.013.8)+(0.4)(8.18.3)+(0.10)(3.854.05)=1.5%.
Whichofthefollowingwouldberegardedastheleastappropriatemethodtomeasuretheperformanceofahedgefund?
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Question#15of169 QuestionID:465718
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Question#16of169 QuestionID:465729
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Separatelong/shortbenchmarks.
TheSharperatio.
Relativeperformancecomparisonswithtraditionalbenchmarks.
Explanation
Constructaseparatelongandshortbenchmark,whichcanthenbecombinedtogetherintheirrelevantproportions.TheSharperatiocomparesthereturntoriskfreeratherthanabenchmark.Relativeperformanceusingtraditionalbenchmarksistheleastappropriategivenhedgefundsconcentrationonabsolutereturnsandthelackofreliabletraditionalbenchmarks.
Accountsthatcontainilliquidassetspresentadditionalproblemsofaccuratelymeasuringreturn.WhichofthefollowingstatementswouldNOTberegardedasaproblemassociateddirectlywithilliquidassets?
Assetsarecarriedatthepriceofthelasttrade.
Accountvaluationsusetradedateaccountingasopposedtosettlementaccounting.
Matrixpricingisused.
Explanation
Theuseoftradedateaccountingisregardedtobeakeyfeatureofagoodreturnmeasurementprocess.Theotheroptionsareexamplesoftheproblemscausedwhenilliquidassetsareincludedintheaccount.Matrixpricingisusingthequotedpriceofasimilarassetasaproxyforthemarketvalueofthinlytradedfixedincomesecurities.
Whichofthefollowingstatementsbestdescribesthestepsrequiredtoconstructacustomsecuritybasedbenchmark?
Identifythemanager'sinvestmentprocessincludingassetselectionandweightinguserepresentativeassetsandlongrunaverageweightingsforthebenchmarkassessandrebalancethebenchmarkonapredeterminedschedule.
Identifythemanager'sinvestmentprocessincludingassetselectionandweightingusethesameassetsandweightingforthebenchmarkassessandrebalancethebenchmarkonapredeterminedschedule.
Identifythemanager'sinvestmentprocessincludingassetselectionandweightingusethesameassetsasthemanagerandthelongrunaverageweightingforthebenchmarkassessandrebalancethebenchmarkonapredeterminedschedule.
Explanation
Thethreestepsrequiredtoconstructacustomsecuritybasedbenchmarkareasfollows:
1.Identifythemanager'sinvestmentprocessincludingassetselectionandweighting.
2.Usethesameassetsandweightingforthebenchmark.
3.Assessandrebalancethebenchmarkonapredeterminedschedule.
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Question#17of169 QuestionID:465696
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Question#18of169 QuestionID:465867
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Question#19of169 QuestionID:465720
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Whatisthemajordifferencebetweenthemoneyweightedandtimeweightedrateofreturn?Themoneyweightedreturn:
penalizesmanagersforcashflowsthatoccuroutsideoftheircontrolwhilethetimeweightedreturndoesnot.
computesthereturnmorepreciselyusingtheinternalrateofreturncomputationwhiletimeweightedreturncomputationisanapproximation.
isaveragedacrossperiodstoarriveatanannualrateofreturnwhilethetimeweightedreturniscompoundedacrossperiodstoarriveatanannualrateofreturn.
Explanation
Thetimeweightedreturniscomputedeverytimeacashflowoccurs,soitdoesnotpenalizemanagersforcashflowsthatoccuroutsideoftheircontrol.Themoneyweightedreturn,ontheotherhand,isimpactedbycashflows.Notethatanapproximationfordifferenttimeperiodscanbemadewhenusingthetimeweightedreturn,however,usinganapproximationwouldbeatthediscretionofthepersoncalculatingthereturnandisnotpartofthemethodologybehindthetimeweightedreturncalculation.
WhichofthefollowingisNOTaconclusionregardingqualitycontrolchartsandhowtheyaretypicallyusedtoevaluatemanagerperformance?
Thisisatwotailedtest.
KeepingamanagerwhogeneratesnovalueaddedwouldbeaTypeIerror.
H willbethatthemanageraddsnovalueH isthatthemanageraddspositivevalue.
Explanation
Thetestissetupasnull,themanagergeneratesnoaddedvalueandthealternativeisthatthemanageraddsvalue.Sowearelookingforpositiveaddedvaluewhichisaonetailedtest.Therefore,thealternativewillbethatthemanagergeneratespositivevalueadded.
Whichofthefollowingisthemostappropriatemethodofcalculatingthemanager'sactivereturn?Themanager'sactivereturnisthe:
portfolioreturnminusthemarketreturn.
marketreturnminusthebenchmarkreturn.
portfolioreturnminusthebenchmarkreturn.
Explanation
Themanager'sactivereturnistheportfolioreturnminusthebenchmarkreturn,wherethebenchmarkisappropriatetothe
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Questions#2022of169
Question#20of169 QuestionID:465756
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Question#21of169 QuestionID:465757
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manager'sstyle.
Ananalysthasgatheredthefollowingassetallocationsandreturnsforthepasttwelvemonths,includinganappropriatebenchmark,for
theSupremeFund.
FundandBenchmarkWeights FundandBenchmarkReturns
AssetClass Fund Benchmark Excess Fund Benchmark Excess
Stock 0.50 0.60 0.10 14.50 12.90 1.60
Bonds 0.45 0.30 0.15 7.20 6.90 0.30
Cash 0.05 0.10 0.05 4.20 4.10 0.10
Basedonthefollowinginformationandassumingariskfreerateof5%,whatistheSharperatioforthePlumbAmericaindexfund?
PlumbAmerica S&P500
Return 22% 18%
Std.Deviation 30% 22%
Beta 1.2 1.0
+0.6716.
+0.5667.
0.5776.
Explanation
Sharperatio=(Returnriskfreerate)/std.deviation=(0.220.05)/0.30=0.5667
ThevalueaddedtotheSupremeFundreturnsattributabletothesectoreffectis:
0.19%.
0.55%.
0.46%.
Explanation
Thebenchmarkreturnis(.6x12.9)+(.3x6.9)+(.1x4.1)=10.22
Attributabletothesectoreffect:(0.500.60)(12.910.22)+(0.450.30)(6.910.22)+(0.050.10)(4.110.22)=0.46%.
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Question#22of169 QuestionID:465758
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Question#23of169 QuestionID:465864
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Questions#2425of169
ThevalueaddedtotheSupremeFundreturnsattributabletothewithinsectoreffectis:
1.06%.
0.94%.
0.67%.
Explanation
Attributabletothewithinsectoreffect:(0.60)(14.512.9)+(0.30)(7.26.9)+(0.10)(4.24.1)=1.06%.
Whenconstructingaqualitycontrolchartwhichofthefollowingisanimportantassumptionthatismadeaboutthedistributionofthemanager'svalueaddedreturns?
Theinvestmentprocessisconsistentthusensuringthatahighdegreeoftheerrorterminoneperiodcanbeexplainedbytheerrorterminthepreviousperiod.
Valueaddedreturnsareindependentfromperiodtoperiodandnormallydistributed.
Thenullhypothesisstatesthattheexpectedvalueaddedreturnistheriskfreerateofreturn.
Explanation
Thenullhypothesisstatesthattheexpectedvalueaddedreturniszero.Wearetestingthemanager'sabilitytogeneratepositiveexpectedvalueaddedreturns.Wewantaconsistentprocesstoensurethatthedistributionofvalueaddedreturnsabouttheirmeanisconstant.Wedoindeedassumethatvalueaddedreturnsareindependentfromoneperiodtothenextandnormallydistributed.
MarkusSmith,CFA,islookingatdifferentmeasuresofriskforbondportfoliosaswellasstockandbondmutualfunds.Hehasseveralprojectscurrentlyunderway.
Smith'sfirstprojectistodecomposethevarioussourcesofreturnfortheBBBBondFund(BBB)whichyieldedareturnof12%.Theactualtreasuryyieldwas8%,whichis1.0%betterthantheexpectedyieldof7.0%.Inaddition,SmithhasascertainedthattheBBBportfoliobenefitedby0.50%duetomaturitymanagementand1.25%fromspread/qualitymanagement.
Smith'ssecondprojectinvolvesAAABondFund(AAA).Smithgathersthefollowingdata:
ActualAAAportfolioreturn=10%(durationofportfolio=10years).LehmanBrothersBenchmarkIndexreturn=8%(durationofportfolio=8years).Accordingtothebondmarketline(BML),thereturnforaportfoliowitha10yeardurationshouldbe9%.TheAAABondFund'slongtermstrategicportfoliohasadurationof9years,andatargetreturnof8.5%.
Smithnowturnshisattentiontowardshisthirdproject,StarEquityFund.Thetablebelowdetailsrelevantinformation:
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Question#24of169 QuestionID:465853
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Question#25of169 QuestionID:465854
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Question#26of169 QuestionID:465805
AssetClass StarFundWeights StarFundReturns BenchmarkReturns
Stocks 0.95 12% 14%
Cash 0.05 4% 5%
OverallStarFundreturn=11.60%Overallbenchmarkreturn=13.82%
Smith'slastprojectisforthePlumbAmericaIndexFund.
PlumbAmerica S&P500
Return 22% 18%
StandardDeviation 30% 22%
Beta 1.2 1.0
Assumingariskfreerateof5%,whatistheTreynormeasureforthePlumbAmericaIndexFund?
+0.1417.
0.1714.
+0.2716.
Explanation
Treynor'smeasure=(Returnriskfreerate)/beta=(0.220.05)/1.2=0.1417
Assumingariskfreerateof5%,whatistheSharperatioforthePlumbAmericaIndexFund?
+0.6716.
+0.5667.
0.5776.
Explanation
Sharperatio=(Returnriskfreerate)/std.deviation=(0.220.05)/0.30=0.5667
AnanalysthasgatheredthefollowinginformationabouttheperformanceofanequityfundandtheS&P500indexoverthesametime
period.
EquityFundS&P500
Return12%16%
StandardDeviation15%19%
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Question#27of169 QuestionID:465722
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Question#28of169 QuestionID:465749
Beta1.181.00
Riskfreerateis6.00%
ThedifferencebetweentheTreynormeasurefortheequityfundandtheTreynormeasurefortheS&P500is:
0.15.
0.07.
0.17.
Explanation
Theequityfund:(0.120.06)/1.18=0.15
TheS&P500:(0.160.06)/1.00=0.22
Theequityfundis(0.15(0.22)=0.07higher
Giventhefollowingdata,howisthemanager'sperformancemostaccuratelycharacterized?
Manager'sReturn 7.6%
BenchmarkReturn 6.2%
MarketIndexReturn 8.8%
Themanagerearnedanexcessreturnfromstylebutnotfromactivemanagement.
Themanagerearnedanexcessreturnfromactivemanagementbutnotfromstyle.
Themanagerearnedanexcessreturnfromstyleandactivemanagement.
Explanation
Themanagerearnedareturnfromactivemanagement,wheretheactivereturnisthemanager'sreturnminusthebenchmarkreturn(7.60%6.20%=1.40%).Themanagerdidnotearnareturnfromstyle,wherethestylereturnisthebenchmarkreturnminusthemarketreturn(6.20%8.80%=2.60%).
ThefollowingdatapertainstotheUBZBalancedFund:
AssetClass FundWeight BenchmarkWeight FundReturn(%) BenchmarkReturn(%)
Stock 0.625 0.500 9.85 8.64
Bond 0.250 0.333 5.34 5.92
Cash 0.125 0.167 2.38 2.47
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Questions#2930of169
Question#29of169 QuestionID:465794
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Question#30of169 QuestionID:465795
Whatisthewithinsectorselectioneffect?
0.291%.
0.397%.
1.085%.
Explanation
Thewithinsectorselectioneffect=[(benchmarkweight)(fundsegmentreturnbench.segmentreturn)]
=[(0.5)(9.858.64)]+[(0.333)(5.345.92)]+[(0.167)(2.382.47)]=0.397%.
PeterMichaels,CFA,worksatCompositeConsulting,andisinchargeofevaluatingtheperformanceofvariousportfoliomanagers.Hismaintasksaretomeasureandevaluatethesourcesofreturnthatcanbeattributedtomanagerperformance.Michaelsunderstandstheimportanceofincorporatingriskintohisanalyses,butrealizesthelimitationsassociatedwithsomeperformancemeasurementtechniquesinaccomplishingthatparticularobjective.Michaelsbeginstheevaluationofanumberofmanagersbyexaminingreturninformationfromboththeportfoliobeingevaluatedanditsdesignatedbenchmark.
MichaelshasthefollowingreturninformationfortheAMGrowthFund:
AMGrowthFund S&P500
Return 14% 12%
Standard
deviation
25% 18%
Beta 1.15 1.00
Iftheriskfreerateiscurrently4%,whichofthefollowingrepresentthecalculationfortheSharpeRatioandtheTreynormeasure,respectively,fortheAMGrowthFund?
0.56and0.12.
0.40and0.09.
0.08and0.02.
Explanation
TheSharperatioisthedifferencebetweentheGrowthFundreturnandtheriskfreeratedividedbytheGrowthFundstandarddeviation[(0.140.04)/0.25=0.40].TheTreynormeasureisthedifferencebetweentheGrowthFundreturnandtheriskfreeratedividedbytheGrowthFundBeta[(0.140.04)/1.15=0.09].
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Question#31of169 QuestionID:465765
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Question#32of169 QuestionID:465717
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Question#33of169 QuestionID:465822
IftheAMGrowthFundisconsideredtobewelldiversified,whichmeasurewouldbemoreappropriateinevaluatingitsrisk/returnperformance?
TheTreynormeasure.
Jensen'sAlphameasure.
TheSharperatio.
Explanation
IftheAMGrowthFundiswelldiversified,theappropriateriskmeasurewouldbebeta,orthesystematicriskcomponentoftotalrisk.Therefore,theTreynormeasurewouldbeappropriateinthiscase.
Incomparingmacroandmicroperformanceattributionmethodologiestoevaluatethedriversofinvestmentperformance,itismostcorrecttosaythat:
bothmacroandmicroevaluationfocusonthedeviationsfrombenchmarks.
microevaluationisanincrementalapproachandmacroevaluationfocusesondeviationsfrombenchmarks.
macroevaluationisanincrementalapproachandmicroevaluationfocusesondeviationsfrombenchmarks.
Explanation
Thisisthemostcorrectstatement.Themacroevaluationlooksatthebeginningandendingvaluesoftheentirefundandattributesthereturncontributedateachlevelofdecisionmaking.Microevaluationlooksatindividualportfoliosandtriestoexplainitsreturnwithrespecttoitsdeviationfromabenchmark.
FrankBelangerwouldliketocalculatetherateofreturnforanilliquidasset.Hestatesthathewillusematrixpricingtoobtainasubstituteforthesecurity'scurrentprice.Whichofthefollowingmostaccuratelydescribesmatrixpricing?Inmatrixpricing,theanalystuses:
thepricefromthelasttradeforthesamesecurity.
anaverageofrecentprices.
dealerquotesforsimilarsecurities.
Explanation
Matrixpricingisusedwhentheassetisilliquidandasecuritypriceisnotreadilyavailable.Inmatrixpricing,theanalystusesdealerquotedpricesforsimilarsecurities.
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Question#34of169 QuestionID:465855
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Question#35of169 QuestionID:465870
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Question#36of169 QuestionID:465860
Whichofthefollowingmeasuresusedtoevaluatetheperformanceofaportfoliomanageris(are)NOTsubjecttotheassumptionsofthecapitalassetpricingmodel(CAPM)?
Jensen'salphaandtheTreynormeasure.
Jensen'salpha.
Sharpemeasure.
Explanation
BoththeTreynormeasureandtheJensen'salphaassumethattheCAPMistheunderlyingriskadjustmentmodel.TheSharpemeasureontheotherhanddoesnotmakethisassumption.Itusestotalriskofaportfolio,unliketheTreynormeasureandJensen'salpha,whichusethesystematic(undiversifiable)riskasmeasuredbybetatocomputetheriskadjustedreturnofaportfolio.
WhichofthefollowingstatementsregardingtheSharperatioismostaccurate?
ThedenominatoroftheSharperatioisstandarddeviationwhichiscomprisedpartlyofsystematicriskcalledbeta.
BetaisnotacomponentoftheSharperatio.
ThemeasureofriskusedinthedenominatoroftheSharperatioisstandarddeviationalsoknownasunsystematicrisk.
Explanation
TheequationfortheSharperatio=(R R )/ .
TheSharperatiocontainsstandarddeviationinthedenominatoroftheequationwhichistotalriskandiscomprisedofbothsystematicriskcalledbetaandunsystematicriskthustheSharperatiodoescontainacomponentofbeta.
Supposethataportfoliomanagementfirmhasabnormallyhighturnoverintheirstaff.Whichofthefollowingisthemostlikelyscenario?
Thefirm'sTypeIerrorrateishighandtheirTypeIIerrorrateishigh.
Thefirm'sTypeIerrorrateishighandtheirTypeIIerrorrateislow.
Thefirm'sTypeIerrorrateislowandtheirTypeIIerrorrateishigh.
Explanation
TypeIerrorisretainingapoormanagerandTypeIIerrorisfiringasuperiormanager.Ifafirmhashighturnoverinstaff,itisunlikelytheyareretainingpoormanagersbutmorelikelythattheyarefiringgoodmanagers.
P F P
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Question#37of169 QuestionID:465724
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Question#38of169 QuestionID:465798
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Whichofthefollowingmeasureswouldbethemostappropriateonetousewhencomparingtheresultsoftwoportfoliosinwhicheachportfoliocontainsonlyafewnumberofstocksrepresentingalimitednumberofindustries?
Informationratio.
Treynormeasure.
Sharperatio.
Explanation
Theequationsforthe3measuresareasfollows:
Sharperatio=(R R )/Treynormeasure=(R R )/
Informationratio=(R R )/( )Sincebothportfoliosarenotwelldiversifiedmostoftheirriskcomesfromunsystematic(companyspecific)riskandisnottiedtotheoveralllevelofriskinthemarketthusinthiscasestandarddeviationisthebestmeasureofrisktouse.TheSharperatioisthebestmeasuretousetocomparethetwoportfolioswhichareundiversifiedsincetheSharperatiousesstandarddeviationortotalriskinthedenominatoroftheequationasitsmeasureofrisk.TheTreynormeasureusesbetaorsystematicmarketriskasthemeasureofriskinthedenominatorandtheinformationratioisbesttousewhencomparingaportfoliotoabenchmark.
Allofthefollowingwouldberegardedasaspecificdisadvantageoffactorbasedmodels,EXCEPT:
itispossibletoconstructmultiplebenchmarks,allhavingthesamefactorexposuresbutwithdifferentreturns.
thebenchmarkmaynotbeinvestable.
themanager'sstylemaydeviatefromthestylereflectedinthebenchmark.
Explanation
Themanager'sstylemaydeviatefromthestylereflectedinthebenchmarkisaweaknessofbroadbasedmarketindexesnotfactormodelbasedbenchmarks.Theotherstatementsareregardedtobedisadvantagesoffactormodelbasedbenchmarks.
WhichofthefollowingstatementsaboutfundperformanceisCORRECT?
Afundhadtotalexcessreturnof1.82%.Ofthetotal,1.60%wasduetothestyleofthefundthatwasspecifiedbythesponsor,and0.22%wasduetosecurityselection.Theamountoftheexcessreturnthatshouldbecreditedtothefundmanageris1.82%.
Whenanalyzingtheperformanceofabondportfoliothemanagershouldbeevaluatedrelativetoastyleuniverse.Focusingonmaturityrangesoraparticularmarketsegmentisnotoneoftheacceptedstyleuniverses.
P F P
P F P
P B PB
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C)
Questions#3944of169
Question#39of169 QuestionID:465774
A)
B)
C)
Anequityfundhadareturnoverthepastyearof17%andastandarddeviationofreturnsof12%.Duringthisperiodtheriskfreereturnwas3%.TheSharperatioforthefundwas1.17.
Explanation
TheSharperatio=(0.170.03)0.12=1.17.
Notethatfocusingonmaturityrangesoraparticularmarketsegmentaredefinitionsofstyleforabondportfoliomanager.Also,managerswhosestylesarespecifiedforthemshouldonlygetcreditfortheexcessreturnthatisduetosecurityselection.
ThefollowinginformationrelatestotheFabregasPensionFund.
ValueonSeptember1 $210,000,000
ContributionsreceivedonSeptember1 $1,050,000
Riskfreereturns(permonth) 0.4%
Valueofthefundif:
netcontributionsvalueisinvestedbasedonthefundsponsor'spolicyallocations $220,369,968
passivelyinvestedintheaggregateofthemanager'srespectivebenchmarks $221,031,078
investedintheaggregateofthemanager'sactualportfolios $221,141,594
TheactualvalueofthefundattheendofSeptemberwas $221,318,507
Whatwastheincrementalpercentagereturncontributionattributabletonetcontributions?
5.0%.
0.0%.
4.9%.
Explanation
DecisionMakingLevel FundValue Incremental%ReturnContribution IncrementalValueContribution
Beginningvalue $210,000,000
Netcontributions $211,050,000 0.0% $1,050,000
Riskfreeasset($211,050,0000.4%) $211,894,200 0.4% $844,200
AssetCategory $220,369,968 4.0% $8,475,768
st
st
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Question#40of169 QuestionID:465775
A)
B)
C)
Question#41of169 QuestionID:465776
A)
B)
C)
Benchmarks $221,031,078 0.3% $661,110
InvestmentManagers $221,141,594 0.05% $110,516
AllocationEffects $221,318,507 0.08% $176,913
TotalFund $221,318,507 4.83% $11,318,507
(StudySession17,LOS34.l)
Whatwastheincrementalpercentagereturncontributionattributabletotheriskfreeasset?
0.40%.
0.04%.
0.39%.
Explanation
DecisionMakingLevel FundValue Incremental%ReturnContribution IncrementalValueContribution
Beginningvalue $210,000,000
Netcontributions $211,050,000 0.0% $1,050,000
Riskfreeasset($211,050,0000.4%) $211,894,200 0.4% $844,200
AssetCategory $220,369,968 4.0% $8,475,768
Benchmarks $221,031,078 0.3% $661,110
InvestmentManagers$221,141,594 0.05% $110,516
AllocationEffects $221,318,507 0.08% $176,913
TotalFund $221,318,507 4.83% $11,318,507
(StudySession17,LOS34.l)
WhatwastheincrementalpercentagereturncontributionattributabletoAssetCategory?
4.02%.
4.00%.
4.94%.
Explanation
DecisionMakingLevel FundValue Incremental%ReturnContribution IncrementalValueContribution
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Question#42of169 QuestionID:465777
A)
B)
C)
Question#43of169 QuestionID:465778
A)
Beginningvalue $210,000,000
Netcontributions $211,050,000 0.0% $1,050,000
Riskfreeasset($211,050,0000.4%) $211,894,200 0.4% $844,200
AssetCategory $220,369,968 4.0% $8,475,768
Benchmarks $221,031,078 0.3% $661,110
InvestmentManagers $221,141,594 0.05% $110,516
AllocationEffects $221,318,507 0.08% $176,913
TotalFund $221,318,507 4.83% $11,318,507
(StudySession17,LOS34.l)
Whatwastheincrementalpercentagereturncontributionattributabletobenchmarks?
0.30%.
0.03%.
0.31%.
Explanation
DecisionMakingLevel FundValue Incremental%ReturnContribution IncrementalValueContribution
Beginningvalue $210,000,000
Netcontributions $211,050,000 0.0% $1,050,000
Riskfreeasset($211,050,0000.4%) $211,894,200 0.4% $844,200
AssetCategory $220,369,968 4.0% $8,475,768
Benchmarks $221,031,078 0.3% $661,110
InvestmentManagers $221,141,594 0.05% $110,516
AllocationEffects $221,318,507 0.08% $176,913
TotalFund $221,318,507 4.83% $11,318,507
(StudySession17,LOS34.l)
WhatwastheincrementalpercentagereturncontributionattributabletoInvestmentManagers?
0.500%.
-
B)
C)
Question#44of169 QuestionID:465779
A)
B)
C)
0.050%.
0.053%.
Explanation
DecisionMakingLevel FundValue Incremental%ReturnContribution IncrementalValueContribution
Beginningvalue $210,000,000
Netcontributions $211,050,000 0.0% $1,050,000
Riskfreeasset($211,050,0000.4%) $211,894,200 0.4% $844,200
AssetCategory $220,369,968 4.0% $8,475,768
Benchmarks $221,031,078 0.3% $661,110
InvestmentManagers $221,141,594 0.05% $110,516
AllocationEffects $221,318,507 0.08% $176,913
TotalFund $221,318,507 4.83% $11,318,507
(StudySession17,LOS34.l)
Whatwastheincrementalpercentagereturncontributionattributabletoallocationeffects?
0.080%.
0.800%.
0.084%.
Explanation
DecisionMakingLevel FundValue Incremental%ReturnContribution IncrementalValueContribution
Beginningvalue $210,000,000
Netcontributions $211,050,000 0.0% $1,050,000
Riskfreeasset($211,050,0000.4%) $211,894,200 0.4% $844,200
AssetCategory $220,369,968 4.0% $8,475,768
Benchmarks $221,031,078 0.3% $661,110
InvestmentManagers $221,141,594 0.05% $110,516
AllocationEffects $221,318,507 0.08% $176,913
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Question#45of169 QuestionID:465869
A)
B)
C)
Question#46of169 QuestionID:465866
A)
B)
C)
Questions#4748of169
TotalFund $221,318,507 4.83% $11,318,507
(StudySession17,LOS34.l)
Supposethatallofafirm'smanagersareoutperformingthebenchmark,somebyalittle,somebyalot.Iftheconfidenceintervalsforaqualitycontrolchartsinportfoliomanagementwerewidened,whatwouldthemostlikelyeffectbe?
TypeIerrorwouldbecomelesslikelyandTypeIIerrorwouldbecomemorelikely.
TypeIerrorwouldbecomemorelikelyandTypeIIerrorwouldbecomelesslikely.
TypeIerrorwouldbecomemorelikelyandTypeIIerrorwouldbecomemorelikely.
Explanation
TypeIerrorisretainingapoorlyperformingmanager.Iftheconfidenceintervalsarewidenedandapoormanagerisbarelyoutperformingthebenchmark,itislesslikelythattheywillhavestatisticallysignificantexcessreturns.WearethusmorelikelytofirethemandhencelesslikelytocommitTypeIerror.Atthesametime,wemaybefiringgoodmanagerswhoareoutperformingthebenchmarkbutyetdonothavestatisticallysignificantexcessreturns.WearethusmorelikelytocommitTypeIIerrorasTypeIIerrorisfiringasuperiormanager.
Supposethataportfoliomanagementfirmhasdecidedthatthecostsofhiringandfiringmanagersareexcessive.Whichofthefollowingwouldbetheirmostappropriatecourseofaction?Thefirmshould:
toleratemoreTypeIerrortoreduceTypeIIerror.
toleratemoreTypeIIerrortoreduceTypeIerror.
reducebothTypeIandTypeIIerrors.
Explanation
TypeIerrorisretainingapoormanagerandTypeIIerrorisfiringasuperiormanager.Ifafirmwishestoreducethecostsofhiringandfiringmanagers,thentheyshouldreducestaffturnover.Sotheyshoulderronthesideofretainingpoormanagers(TypeIerror)toreducethechanceoffiringsuperiormanagers(TypeIIerror).Theymightdothisbyrelaxingtheperformancecriteriamanagersmustmeet.
PeterMichaels,CFA,worksatCompositeInvestmentManagementConsulting(Composite),whereheisinchargeofevaluatingtheperformanceofallseparateaccountmanagersthatCompositeusesforitsinstitutionalclientele.Hismaintasksaretomeasureandevaluatethesourcesofreturnthatcanbeattributedtomanagerperformance.Michaelsunderstandstheimportanceofincorporatingriskintohisanalyses,butrealizestherearelimitationsassociatedwithsomeperformancemeasurementtechniquesinaccomplishingthatparticularobjective.
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Question#47of169 QuestionID:465844
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B)
C)
Question#48of169 QuestionID:465845
A)
B)
C)
CurrentlyMichaelsisworkingonanevaluationoftheAMGlargecapitalizationgrowthfundandhasassembledthefollowingoneyearreturninformation.
AMGFund S&P500
Return 14% 12%
StandardDeviation 25% 18%
Beta 1.15 1.00
RiskFreeRate 4% 4%
TheSharpeandTreynorratios,respectively,fortheAMGrowthFundare:
0.44and0.10.
0.40and0.09.
0.08and0.02.
Explanation
Sharperatio=(RR )/
where:R=returnR =riskfreereturn=standarddeviationTheSharperatioisthedifferencebetweentheGrowthFundreturnandtheriskfreeratedividedbytheGrowthFundstandarddeviation[(0.140.04)/0.25=0.40].
Treynormeasure=(RR )/
where:R=returnR =riskfreereturn=betaTheTreynormeasureisthedifferencebetweentheGrowthFundreturnandtheriskfreeratedividedbytheGrowthFundBeta[(0.140.04)/1.15=0.09].
IftheAMGrowthFundisconsideredafocused,undiversifiedportfolio,whichmeasurewouldbemoreappropriateinevaluatingitsrisk/returnperformance?
TheSharperatio.
TheTreynormeasure.
Jensen'sAlphameasure.
Explanation
IftheAMGrowthFundisundiversified,theSharperatiowouldbemoreappropriate.TheSharperatiomeasuresexcessreturnperunitoftotalrisk,whileTreynormeasuresexcessreturnperunitofsystematicrisk.Forawelldiversifiedportfolio,therankingsbetweentheSharpeandTreynormeasureswillbeinsignificantastotalriskandsystematicriskwillbeapproximately
f
f
f
f
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Question#49of169 QuestionID:465741
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B)
C)
Question#50of169 QuestionID:465797
A)
B)
C)
Question#51of169 QuestionID:465787
thesame.However,ifaportfolioisnotwelldiversified,theTreynormeasuremayoverstatetheportfolio'srankingbecauseonlysystematicriskisconsidered.Sharpewillconsiderunsystematicrisk,whichwillgivetheundiversifiedportfolioamoreappropriateranking.
Whichofthefollowingwouldbeleastappropriateinmacroperformanceevaluation?
Marketindiceswouldbeusedformanagerstyles.
Externalcashflowswouldbeusedtodeterminetheimpactofthesponsor'sdecisionmaking.
Abenchmarkreturniscalculatedasaweightedaverageoftheindividualmanagers'benchmarkreturns.
Explanation
Broadmarketindiceswouldbeusedforassetcategories.Narrowindiceswouldbeusedformanager'sinvestmentstyles.
Whichofthefollowingstatementsregardingdiversificationandriskadjustedperformancemeasuresisleastaccurate?
Investorswanttheirportfoliomanagerstocompletelydiversifytheirportfolios.
Treynor'sperformancemeasureshouldbeusedtoevaluateportfoliosthatwillbeanaddition
toanoveralllargerportfolio.
Treynor'sperformancemeasureassumesawelldiversifiedportfolio.
Explanation
Ifaportfoliomanagercompletelydiversifies(i.e.,eliminatesallnonsystematicrisk),thentheappropriaterateofreturnwouldbethatof
themarket.However,whywouldyoupayactivemanagementfeestogetthesamereturnofapassivelymanagedindexproduct?Treynor
usesbetaasitsriskmeasure,whichmeansthatitshouldbeusedinthecontextofadiversifiedportfolio.
Thefollowingareanumberofcontributionstoreturnforafixedincomeportfolio:1. Returnoninterestratemanagement2. Returnontradingactivity3. Returnduetochangesinforwardrates4. Returnonthedefaultfreebenchmark
Whichoftheabovestatementsis(are)CORRECT?
EffectofExternalInterestEnvironment
ContributionoftheManagementProcess
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A)
B)
C)
Question#52of169 QuestionID:465806
A)
B)
C)
Question#53of169 QuestionID:465868
A)
B)
C)
3and4 1and2
3 1,2and4
1and3 2and4
Explanation
Changesinforwardratesandthereturnonthedefaultfreebenchmarkareoutsideofthemanager'sinfluenceandarethereforepartoftheexternalinterestenvironment.Interestratemanagementandtradingactivityareanintegralpartoftheroleofthemanagerandarethereforepartofthemanagementprocess.Rememberwecouldalsoincludereturnfromsector/qualitymanagementandreturnfromtheselectionofspecificsecurities.
Jensen'salphaforaportfoliomeasuresthe:
fund'sreturninexcessoftherequiredrateofreturngiventhesystematicriskoftheportfolio.
differencebetweenafund'sreturnandthemarketreturn.
fund'sreturninexcessoftherequiredrateofreturngiventheunsystematicriskoftheportfolio.
Explanation
Jensen'salphameasuresthereturnabovetherequiredrateofreturnbasedonthefund'ssystematicrisk.Saiddifferently,Jensen'salphaistheamountofreturnearnedbythefundoverandabovethereturnpredictedforthefundbasedonthecapitalassetpricingmodel,giventhefund'ssystematicrisk.
JackJensenisthepresidentofJensenManagement.Jensenprideshimselfonthecareofhisemployees.Hestatesthatin30yearsofportfoliomanagement,hehasonlyhadtofiretwoemployees.TomMercerispresidentofAnalyticalInvestors.Hispolicyhasbeentoreplacepoorlyperformingmanagers,wherepoorperformanceequalsunderperformingtheirbenchmarkfortwosuccessivequarters.Whichofthefollowingbestdescribesthesemanagers'continuationdecisions?
JensenislikelycommittingTypeIerrorandMercerislikelycommittingTypeIIerror.
JensenislikelycommittingTypeIIerrorandMercerislikelycommittingTypeIerror.
JensenisnotlikelytobecommittinganyerrorandMercerislikelycommittingTypeIIerror.
Explanation
TypeIerrorisretaining(orhiring)apoorlyperformingmanager.JensenislikelycommittingTypeIerrorbecauseherarelyfiresanyone.TypeIIerrorisfiring(ornothiring)asuperiormanager.JensenislikelycommittingTypeIIerrorbecausehefiresmanagersafteronlytwoquartersofunderperformance.Twoquartersisnotenoughtimetoproperlyevaluateamanager.
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Question#54of169 QuestionID:465792
A)
B)
C)
Question#55of169 QuestionID:465732
A)
B)
C)
Question#56of169 QuestionID:465781
A)
B)
TheSharperatio,Treynormeasure,theM measureandJensen'sAlphatechniquesallmeasuretherisk/returnperformanceofportfolios.Whichofthefollowingstatementsaboutthesemeasurementtechniquesisleastaccurate?
WhiletheTreynormeasurecomputesexcessreturnperunitofrisk,Jensen'sAlphameasuresdifferentialreturnforagivenlevelofrisk.
UsingthecapitalmarketlinetheM comparestheaccount'sreturntothemarketreturnandisacomparativemeasure.
TheSharperatiomeasurestheslopeofthecapitalallocationline(CAL),withthelowestslopehavingthemostdesirablerisk/returncombination.
Explanation
AlthoughitistruethattheSharperatiomeasurestheslopeoftheCAL,thehighertheslopethemoredesirabletheportfolio.YourgoalistoselecttheportfoliothathasthehighestSharpemeasure,whichwillalsohavethesteepestslope.Atanygivenrisklevel,thehighertheslopethegreaterthereturn.
Whichofthefollowingbestdescribestheimpactofsurvivorshipbiasonusingmanageruniversesasbenchmarks?
Fundsponsorswillterminateunderperformingmanagers,underperformingaccountswillnotsurvive,andthemedianwillbebiasedupwards.
Asconsistentlyunderperformingfundsareterminatedbythefundsponsors,thesurvivingfundsshrinkinnumbersuchthatinafairlyshortperiodoftimethenumberoffundsistoosmalltoallowmeaningfulbenchmarking.
Fundsponsorsarereluctanttoterminateunderperformingfunds,theseaccountssurviveinthebenchmark,andthemedianwillbebiaseddownwards.
Explanation
Theevidenceisclear.Fundsponsorswillrationallyterminateunderperformingmanagers,underperformingaccountswillnotsurvive,andthemedianwillbebiasedupwards.Fundsponsorsdemonstratelittleappetiteforunderperformingaccountsandtheyarequicklyremoved.
Whichofthefollowingstatementsrelatingtoallocation/selectionattributionandfundamentalfactormodelattributionisleastaccurate?
Thestrengthofallocation/selectionattributionisthatitdisaggregatesperformanceeffectsofmanager'sdecisionsbetweensectorsandsecurities.
Thestrengthoffundamentalfactoranalysisisitssimplicityandthereliabilityofthecorrelationsitproduces.
2
2
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Questions#5759of169
Question#57of169 QuestionID:465840
A)
B)
C)
Question#58of169 QuestionID:465841
A)
B)
Thestrengthofallocation/selectionattributionisthatitisrelativelyeasytocalculate.
Explanation
Akeyweaknessoffundamentalfactormodelattributionisthatitcanprovetobecomplexleadingtothepotentialforspuriouscorrelations.
Thefollowingdatahasbeencollectedtoappraisetheperformanceoffourassetmanagementfirms:
DixonFund AdamsFund BouldFund WinterburnFund MarketIndex
Return 5.12% 7.68% 8.00% 4.80% 6.4%
Beta 0.95 1.08 1.40 0.80 1.00
Variance 14.05 15.50 20.25 9.20 12.25
Theriskfreerateofreturnis4%.
UsingtheTreynormeasure,rankthefourfundsintermsoftheriskadjustedexcessreturnsstartingwiththehighestperformingfundandendingwiththelowestperformingfund:
Bould,Adams,Dixon,Winterburn.
Adams,Bould,Dixon,Winterburn.
Adams,Bould,Winterburn,Dixon.
Explanation
Thustherankingis1)Adams2)Bould3)Dixon4)Winterburn.
UsingtheM Measure,rankthefourfundsintermsoftheriskadjustedexcessreturnsstartingwiththehighestperformingfundandendingwiththelowestperformingfund:
Adams,Bould,Dixon,Winterburn.
Adams,Dixon,Winterburn,Bould.
2
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Question#59of169 QuestionID:465842
A)
B)
C)
Question#60of169 QuestionID:465796
A)
B)
C)
Bould,Adams,Dixon,Winterburn.
Explanation
Thustherankingis1)Adams2)Bould3)Dixon4)Winterburn.
UsingtheSharpeMeasure,rankthefourfundsintermsoftheriskadjustedexcessreturnsstartingwiththehighestperformingfundandendingwiththelowestperformingfund:
Bould,Adams,Dixon,Winterburn.
Adams,Bould,Dixon,Winterburn.
Adams,Bould,Winterburn,Dixon.
Explanation
Thustherankingis1)Adams2)Bould3)Dixon4)Winterburn.
IfHillusestheSharpemeasureashischosenperformancemeasure,whichportfoliowouldheadd?
ManagerC.
ManagerB.
ManagerA.
Explanation
PortfolioManager Return Beta Standard Sharpe
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Question#61of169 QuestionID:465719
A)
B)
C)
Question#62of169 QuestionID:465727
A)
B)
C)
Question#63of169 QuestionID:465747
Deviation
A 0.13 0.75 0.06 1.33
B 0.17 0.85 0.11 1.09
C 0.08 1.20 0.01 3.00
WhichofthefollowingwouldNOTberegardedtobeaproblemrelatingtothequalityofdatausedincalculatingratesofreturn?
Accountvaluationsincludetradedateaccounting.
Matrixpricingisusedforsomefixedincomesecurities.
Whenaccountscontainilliquidassets,estimatesorguessesareusedinthecalculation.
Explanation
Theuseoftradedateaccountingwouldberegardedasapositiveattributeoftheaccountinthecontextofmeasuringreturns.Tradedateaccountingispreferredtosettlementdateandtheinclusionofaccruedinterestanddividendswouldbeideal.Matrixpricingistheuseofestimatedpricestakenfromquotedpricesonsecuritieswithsimilarcharacteristicsthiscouldclearlyintroduceinaccuraciesinthemeasurementofreturns.
Whichofthefollowingisleastlikelytobeapropertyofavalidbenchmark?
Itispossiblefortheinvestortoreplicatethebenchmark.
Theweightsofthesecuritiesinthebenchmarkshouldbebasedonmarketvalues.
Thebenchmarkisconsistentwiththemanager'sstyle.
Explanation
Thesecurityweightsinabenchmarkshouldbeclearlyidentifiedbutthereisnostipulationthatavalidbenchmarkhavesecurityweightsbasedonmarketvalues.
BudSeilmanistheportfoliomanagerofawelldiversifiedequityportfolio.Thefollowinginformationisavailableabouttheportfolioforthelatestyear.
Weight Return
Asset
Class
FundBenchmarkFundBenchmark
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B)
C)
Question#64of169 QuestionID:465751
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Question#65of169 QuestionID:465786
A)
B)
C)
Largecap 0.50 0.35 14% 15%
Midcap 0.30 0.40 19% 12%
Smallcap 0.20 0.25 8% 18%
Usingportfolioattributionanalysis,whatisthetotaleffectofactivemanagementforSeilman'sportfolio?
0.40%.
0.25%.
0.40%.
Explanation
Totaleffect=R R,R =(0.514)+(0.3019)+(0.208)=14.30R =(0.3515)+(0.4012)+(0.2518)=14.55Totaleffect=14.3014.55=0.25%
Whichofthefollowingstatementsregardingattributionanalysis,benchmarks,andevaluatingportfoliomanagersisCORRECT?
Attributionanalysisforbondsisvirtuallyimpossible.
BenchmarkerrorisnonexistentwiththeTreynormeasure.
Attributionanalysisseparatesaportfoliomanager'sperformanceintoanallocationeffectandaselectioneffect.
Explanation
Attributionanalysiscanbedonewithbondsasitiswithequities.Theonlydifferenceisthecategoriesofattribution.BenchmarkerrorisverymuchapartoftheTreynormeasure,asitusesbetaasitsriskmeasure.
Whichofthefollowingstatementsinrelationtotheeffectoftheexternalinterestenvironmentisleastaccurate?
Returnonthedefaultfreebenchmarkassumesnochangeintheforwardrates.
Theoveralleffectrepresentstheperformanceofapassive,defaultfreebondportfolio.
ThereturnduetotheexternalinterestrateenvironmentisestimatedfromatermstructureanalysisofAAAratecorporatesecurities.
Explanation
ThereturnduetotheexternalinterestrateenvironmentisestimatedfromatermstructureanalysisofTreasurysecurities.Wearetryingtoestablishthereturnonadefaultfreebondportfolio,thereforetheuseofcorporatesecuritieswouldbeinappropriate.
P b
P
b
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Question#66of169 QuestionID:465744
A)
B)
C)
Questions#6768of169
Question#67of169 QuestionID:465847
A)
B)
C)
Question#68of169 QuestionID:465848
A)
Whichofthefollowingistheleastlikelytobeaninputintomicroperformanceevaluation?
Thereturnontheriskfreeasset.
Thesectorreturnforthemanager.
Theweightofasectorinthebenchmark.
Explanation
Thereturnontheriskfreeassetisnotaninputintomicroperformanceevaluationbutitwouldbeusedasaninputintomacroperformanceevaluation.
ThefollowingdetailsareavailableforthePrimeGrowthFund,S&P500,andU.S.TreasuryBills(Tbills)forthe5yearperiodfrom1995to2000.
PrimeGrowth S&P500 Tbill
Averageannualrateofreturn
12.00% 9.50% 3.00%
Standarddeviationofreturns
22% 14%
Beta 1.12
WhatistheSharperatioforthePrimeGrowthFundandfortheS&P500?
0.640.29.
0.410.46.
1.121.00.
Explanation
Sharperatio=S=(R R )/
ForthePrimeGrowthFund,theSharperatio=(123)/22=0.41
FortheS&P500,theSharperatio=(9.503.00)/14=0.46
WhatistheTreynormeasureforthePrimeGrowthFundandtheS&P500?
0.080.07.
j j F j
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B)
C)
Questions#6970of169
Question#69of169 QuestionID:465850
A)
B)
C)
Question#70of169 QuestionID:465851
A)
B)
C)
Question#71of169 QuestionID:465688
8.044.91.
0.640.29.
Explanation
Treynormeasure=T =(R R )/
ForPrimeGrowthFund,theTreynormeasure=(0.120.03)/1.12=0.0804
FortheS&P500,theTreynormeasure=(0.09500.03)/1=0.0650
ThefollowinginformationisavailablefortheTrumarkFund:
TheTrumarkFundhasanaverageannualreturnof12%overthelastfiveyears.Trumarkhasabetavalueof1.35.Trumarkhasastandarddeviationofreturnsof16.80%.Duringthesametimeperiod,theaverageannualTbillratewas4.5%.Duringthesametimeperiod,theaverageannualreturnontheS&P500portfoliowas18%.
WhatistheSharperatiofortheTrumarkFund?
0.80.
5.56.
0.45.
Explanation
SharpeRatio=S=(R R )/ =(124.50)/16.80=0.45
WhatistheTreynormeasureforTrumarkFund?
0.06.
0.45.
0.04.
Explanation
Treynormeasure=T =(R R )/ =(0.12.0450)/1.35=0.0556
Whichofthefollowingformulaswouldrepresentanappropriatecalculationoftherateofreturnearnedbyafundwhenthefundreceivesanexternalcashflowatthebeginningofaperiod?
j j F j
j j F j
j j F j
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A)
B)
C)
Questions#7274of169
Question#72of169 QuestionID:465770
A)
B)
C)
Explanation
Ifanexternalcashflowisreceivedatthebeginningofaperiodthenthemarketvalueatthispointisadjustedtoincludethatcashflow,itisaddedtotheopeningmarketvalueofthefundanditisaddedtothedenominator.Inthisway,thereturnmeasurereflectsthereturnonthefundsundermanagementduringthemeasurementperiod.
FlaminiFundhasthefollowingresultsforamicroattributionanalysis:
EconomicSectors
Portfolio
Sector
Weight(%)
Benchmark
Sector
Weight(%)
Portfolio
Sector
Return(%)
BenchmarkSector
Return(%)
Agricultural 5.21 5.08 1.03% 1.02%
CapitalGoods 10.73 11.23 0.87% 0.93%
ConsumerDurables 3.78 4.12 5.24% 5.25%
Energy 20.56 25.79 0.50% 1.56%
Financial 35.43 30.43 3.43% 2.56%
Technology 13.79 16.05 2.78% 4.56%
Utilities 7.80 5.26 2.89% 3.09%
Cashandequivalents 2.70 2.04 0.02% 0.02%
Portfolio 100.00 100.00 1.71% 1.22%
Usingthedatafromtheabovetable,whatistheperformanceimpactduetothefinancialsectorallocation?
0.0221%.
0.0670%.
0.0435%.
Explanation
R =(W W )(R R )R =(0.3543%0.3043%)(2.56%1.22%)R =(0.05)(1.34%)=0.067%
FS P,FS B,FS B,FS B
FS
FS
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Question#73of169 QuestionID:465771
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B)
C)
Question#74of169 QuestionID:465772
A)
B)
C)
Question#75of169 QuestionID:465819
A)
B)
C)
Question#76of169 QuestionID:465709
A)
B)
C)
Usingthedatafromtheabovetable,whatistheenergywithinsectorallocationreturn?
0.53%.
0.42%.
0.27%.
Explanation
R =W (R R )R =0.2579(0.5%(1.56%))R =0.53%
Usingthedatafromtheabovetable,whatistheallocation/selectioninteractionreturnforTechnology?
0.40%.
+0.04%.
0.04%.
Explanation
R =(W W )(R R )R =(0.13790.1605)(2.78%4.56%)R =0.04%
Ifaportfoliohadanalphaof10bps,thentheportfolio:
earned10bpslessthanthemarket.
earned10bpslessthanthemarketonariskadjustedbasis.
hadlessriskthanthemarket.
Explanation
RecallthatJensen'salphameasuresexcessreturnforagivenlevelofrisk.Itisa"riskadjusted"measureofreturn.
Onelimitationofthetimeweightedreturnisthefactthatit:
penalizesmanagersforcashflowsthatoccuroutsideoftheircontrol.
requirescomputationseverytimeacashflowoccurs.
requiresthecomputationoftheinternalrateofreturneverytimeacashflowoccurs.
E B,E P,E B,E
E
E
T P,T B,T P,T B,T
T
T
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Question#77of169 QuestionID:465760
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Question#78of169 QuestionID:465863
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Question#79of169 QuestionID:465804
Explanation
Thetimeweightedreturncomputationrequirescomputationofreturneverytimeacashflowoccurs.Oneoftheadvantagesofthetimeweightedreturnisthatpassivebenchmarksusethesamecalculationmethodologywhichmakesitcomparabletopassivebenchmarksandotherportfoliomanagers.
YouhaveperformedattributionanalysisfortheXVXPortfolioandhavedeterminedthatthesectoreffectwas0.322%,thewithinsectorselectionwas0.157%,andtheallocation/selectioneffectwas0.061%.Thebenchmarkreturnwas8.441%.Howmuchwasthemanager'stotalvalueaddedforXVX,andwhatwastheXVXPortfolio'sreturnduringtheperiod?
0.226%,8.667%.
0.418%,8.859%.
0.226%,8.215%.
Explanation
Totalvalueadded=0.322+(0.157)+0.061=0.226%.Portfolioreturn=8.441+0.226=8.667%.
Whichofthefollowingbestdescribestheuseofqualitycontrolchartsinportfoliomanagement?Qualitycontrolchartsareusedtodetermineifamanagerhas:
statisticallysignificantexcessreturns.
substantialexcessreturns.
strayedfromtheirstatedstyle.
Explanation
Inportfoliomanagement,qualitycontrolchartsareusedtodetermineifamanagerhasstatisticallysignificantexcessreturns.Themanager'sreturnsversusabenchmarkareplottedonagraphwheretimeisonthexaxisandvalueadded(excess)returnisplottedontheyaxis.Aconfidenceintervalisformedaroundthexaxisofzero.Ifthemanager'sreturnsplotoutsidetheconfidenceinterval,weconcludethatthemanagerhasgeneratedstatisticallysignificantexcessreturns.
AnanalysthasgatheredthefollowinginformationabouttheperformanceofanequityfundandtheS&P500indexoverthesametime
period.
EquityFundS&P500
Return32%26%
StandardDeviation41%29%
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Question#80of169 QuestionID:465748
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Beta0.981.00
Riskfreerateis6.00%
ThedifferencebetweentheSharperatiofortheequityfundandtheSharperatiofortheS&P500isthe:
equityfundis0.06lower.
S&P500is0.04lower.
S&P500is0.09higher.
Explanation
TheequityfundSharperatio:(0.320.06)/0.41=0.63
TheS&P500Sharperatio:(0.260.06)/0.29=0.69
Theequityfundis(0.630.69)=0.06lower
Theresultsofamacroperformanceattributionanalysisofafundislistedbelow.
FundValue
Beginningvalue $100,000
Netcontributions 100,000
Riskfreeasset 101,000
Assetcategory 108,000
Benchmarks 109,000
Investmentstrategies
110,000
Allocationeffects 112,000
Hadthemanageronlyengagedinapureindexapproach,insteadof12%,thereturnofthefundwouldhavebeen:
9%.
8%.
10%.
Explanation
Return=8%=($108,000$100,000)/$100,000.TheAssetCategoryinvestmentstrategyassumesthattheFund'sbeginningvalueandexternalcashflowsareinvestedpassivelyinacombinationofthedesignatedassetcategorybenchmarks,withthespecificallocationtoeachbenchmarkbasedonthefundsponsor'spolicyallocationtothoseassetcategories.Inessence,thisapproachisapureindexfundapproach.Theassetcategorycorrespondstoapureindexapproach.Thedollarreturnwouldhavebeen$8,000or8%ontheinitial$100,000.
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Question#81of169 QuestionID:465763
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Question#82of169 QuestionID:465764
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Question#83of169 QuestionID:465725
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Question#84of169 QuestionID:465759
Valueaddedreturnisdefinedasthe:
portfolioreturninexcessofthereturnpredictedbasedontheCapitalAssetPricingModel.
fundreturnminustheriskfreerateofreturn.
portfolioreturnminusthebenchmarkreturn.
Explanation
Valueaddedreturn=PortfolioreturnBenchmarkreturn
Whichofthefollowingareexamplesofanassetallocationstrategyusedbyaportfoliomanager?
Selectingassetswithinamarketsegmentthatwilloutperformtheassetscontained
withinthecorrespondingbenchmarkindex.
Bothmarkettimingandsectorrotation.
Sectorrotation.
Explanation
Bothmarkettimingandsectorrotationareexamplesofassetallocationstrategies.
Whichofthefollowingstatementsaboutstyleindexesisleastaccurate?
Theyhelpfundsponsorsbetterunderstandamanager'sinvestmentstyle,bycapturingfactorexposures.
Theyarewidelyavailable,widelyunderstoodandwidelyaccepted.
Somestyleindexescancontainweightingsincertainsecuritiesand/orsectorsthatmaybelargerthanconsideredprudent.
Explanation
Helpingfundsponsorsbetterunderstandamanager'sinvestmentstyle,bycapturingfactorexposuresisanadvantageoffactormodelsandnotstyleindexes.Theotherstatementsaretrueinthecontextofstyleindexes.
RobertBrownisintheprocessofdecomposingthevarioussourcesofreturntohisbondportfoliothatyieldedareturnof10%.
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Question#85of169 QuestionID:465691
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Question#86of169 QuestionID:465721
Theactualtreasuryyieldwas8%,whichis0.5%betterthantheexpectedyieldof7.5%.Inaddition,Brownhasascertainedthathisportfoliobenefitedby0.50%duetosectorallocationand0.25%fromallocation/selectioninteraction.Basedonthisinformation,howmuchoftheportfolio'soverallreturnisattributabletowithinsectorselection?
1.25%.
1.00%.
1.75%.
Explanation
Expectedtreasuryyield =7.50%
Unexpectedtreasuryyield =0.50%
Returnfromsectorallocation =0.50%
Returnfromallocation/selectioninteraction =0.25%
Returnattributabletowithinsectorselection=1.25%
(canbebackedoutgiventheotherinformation)
Totalreturn =10.0%
TheCampbellaccountis$5,000,000atthebeginningofJanuaryand$5,200,000attheendofthemonth.Duringthemonthacontributionof$60,000wasreceived.WhatwouldbetherateofreturnontheaccountifthecontributionwasreceivedonJanuary1,whatwoulditbeifthecontributionwasreceivedonJanuary31?
January1 January31
4.00% 2.80%
2.77% 4.00%
2.77% 2.80%
Explanation
Ifthereceiptwasatthebeginningoftheperiodthen:
Ifthereceiptwasattheendoftheperiodthen:
Giventhefollowingdata,howisthemanager'sperformancemostaccuratelycharacterized?
Manager'sReturn 5.2%
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Question#87of169 QuestionID:465802
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Question#88of169 QuestionID:465684
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BenchmarkReturn 6.3%
MarketIndexReturn 4.3%
Themanagerearnedanexcessreturnfromstyleandactivemanagement.
Themanagerearnedanexcessreturnfromactivemanagementbutnotfromstyle.
Themanagerearnedanexcessreturnfromstylebutnotfromactivemanagement.
Explanation
Themanagerearnedareturnfromstyle,wherethestylereturnisthebenchmarkreturnminusthemarketreturn(6.30%4.30%=2.00%).Themanagerdidnotearnareturnfromactivemanagement,wheretheactivereturnisthemanager'sreturnminusthebenchmarkreturn(5.20%6.30%=1.10%).
Theratioofreturntosystematicriskforaninvestmentportfoliois0.70,whilethemarketis0.50.Thisinformationsuggeststhatthe
portfolio:
exhibitssuperiorperformancebecausethereturnperunitofriskisabovethatofthe
market.
isnotdiversifiedenough,andmoresecuritiesshouldbepurchasedtobringtheportfolioinline
withthemarket.
exhibitsinferiorperformancebecauseithasmoreriskthanthemarket.
Explanation
Riskaverseinvestorspreferaportfoliowithahigherratioofreturntosystematicrisktoaportfoliowithalowerratio.Inthiscase,wecanalsosaythattheportfoliowouldplotabovetheSMLsincetheportfolio'sratioisabovethatofthemarket.SinceportfoliosthatplotabovetheSMLareundervalued,theyarelikelytoprovideanaboveaveragereturn.Note:Theratio(Treynor'sMeasure)implicitlyassumesadiversifiedportfolio,hencetheuseofbeta(orsystematicrisk)inthedenominator.
JuneSpraker,CFA,managesaportfolioforaprivatefamily.Intherecentupdateoftheinvestmentpolicystatement(IPS),thefamilyhasaskedSprakertoincreasethesophisticationofherportfolioperformanceevaluationtogiveanexhaustiveassessmentoftheriskstowhichtheportfolioisexposed.ThefamilyinsistsonincludingthedetailsoftheevaluationprocessintheIPS.Theirrequestis:
notjustifiedbecauseportfolioperformanceevaluationshouldnotbeaddressedintheIPS.
justifiedbecausethisiswhatthelawrequires,buttheusefulnessoftherequestisnotclear.
justifiedbecausethereareawidevarietyofwaysinvestmentreturnscanbeearnedwithmanytypesofriskexposures,andthedetailsoftheprocessshouldbeintheIPS.
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Question#89of169 QuestionID:465734
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Questions#9091of169
Question#90of169 QuestionID:465767
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B)
C)
Explanation
UnderstandinghowareturnwasearnedisveryimportantsothatthemanagercanknowifthefundhadthecorrectexposuresasspecifiedintheIPS.
Whichofthefollowingbestcharacterizesmanageruniversesasabenchmark?Manageruniverses:
arenotavalidbenchmarkbecausetheyarenotmeasurable.
areavalidbenchmarkbecausetheyaremeasurable.
arenotavalidbenchmarkbecausetheyarenotinvestable.
Explanation
Manageruniversesarenotavalidbenchmarkbecausetheyarenotinvestable,arenotspecifiedinadvance,andarenotunambiguous.Itisalsoimpossibletodetermineiftheyareappropriateduetotheambiguityofthemedianmanager.Furthermore,theperformancerecordsofpoormanagersaredroppedfrommanageruniversessothereisanupwardbias(i.e.,survivorshipbias)wherethemedianmanager'sreturnisinflated.Theonlypropertyofavalidbenchmarkthatmanageruniversesfulfillisthattheyaremeasurable.
BudSeilmanistheportfoliomanagerofawelldiversifiedequityportfolio.Thefollowinginformationisavailableabouttheportfolioforthelatestyear.
Weight Return
Asset
Class
FundBenchmarkFundBenchmark
Large
cap
0.50 0.40 14% 15%
Midcap 0.30 0.35 19% 12%
Small
cap
0.20 0.25 8% 18%
Usingportfolioattributionanalysis,whatisthesectorallocationeffectforSeilman'sportfolio?
0.03%.
0.4%.
0.0%.
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Question#91of169 QuestionID:465768
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Question#92of169 QuestionID:465746
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Questions#9398of169
Explanation
R =(0.415)+(0.3512)+(0.2518)=14.70%
SectorEffect={(W W )(R R )}OrSectoreffect=[((0.500.40)(1514.7))+((0.300.35)(1214.7))+((0.200.25)(1814.7))]=[0.03+0.1350.165]=0.0%
Usingportfolioattributionanalysis,whatisthewithinsectorselectioneffectforSeilman'sportfolio?
0%.
0.45%.
0.03%.
Explanation
WithinsectorselectionEffect=[(W (R R )]Withinsectorselectioneffect=[(0.40(1415))+(0.35(1912))+(0.25(818))]=0.45%
FrankBusbyisontheboardforapensionfundandwouldliketoevaluatethefund'sperformanceanddetermineitssourcesofreturn.WhichofthefollowingisBusbymostlikelytoutilize?
Microperformanceevaluation.
Performancedecompositionanalysis.
Macroperformanceevaluation.
Explanation
Macroperformanceevaluationisperformedatthefundsponsorlevel.Itdecomposesfundperformanceintothatfromnetcontributions,theriskfreeasset,assetcategories,benchmarks,investmentmanagers,andallocationeffects.
KelliBlakelyisaportfoliomanagerfortheMirandaFund(Miranda),acorelargecapequityfund.ThemarketproxyandbenchmarkforperformancemeasurementpurposesistheS&P500.AlthoughtheMirandaportfoliogenerallymirrorstheassetclassandsectorweightingsoftheS&P,Blakelyisallowedasignificantamountofleewayinmanagingthefund.HerportfolioholdsonlystocksfoundintheS&P500andcash.
Blakelywasabletoproduceexceptionalreturnslastyear(asoutlinedinTableAbelow)throughhermarkettimingandsecurityselectionskills.Attheoutsetoftheyear,shebecameextremelyconcernedthatthecombinationofaweakeconomyandgeopoliticaluncertaintieswouldnegativelyimpactthemarket.Takingaboldstep,shechangedhermarketallocation.Fortheentireyearherassetclassexposuresaveraged50%instocksand50%incash.TheS&P'sallocationbetweenstocksandcashduringperiodwasaconstant97%and3%,respectively.Theriskfreerateofcashreturnswas2%.
Table1OneYearTrailingReturns:MirandaFundvs.S&P500
b
pi bi bi b
Bj Pj Bj
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Question#93of169 QuestionID:465826
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Question#94of169 QuestionID:465827
A)
MirandaFund S&P500
Return 10.2% 22.5%
Standard
Deviation
37% 44%
Beta 1.10 1.00
WhataretheSharperatiosfortheMirandaFundandtheS&P500?
MirandaFund S&P500
0.3515 0.2227
0.2216 0.5568
0.0745 0.2450
Explanation
TocalculatetheSharperatio,usethefollowingformula:
Sharperatio=(RR )/
where:
R=return
R =riskfreereturn
=standarddeviation
TheSharperatiofortheMirandaFundis:
(0.1020.02)/0.37=0.2216
TheSharperatiofortheS&P500is:
(0.2250.02)/0.44=0.5568
BasedontheSharperatio,BlakelyoutperformedtheS&P500onariskadjustedbasis(whenriskisdefinedastotalrisk).TheSharperatioisbestforportfolioswithlargeamountsofunsystematicrisk.(StudySession17,LOS34.p)
WhatistheTreynormeasurefortheMirandaFundandtheS&P500?
MirandaFund S&P500
0.2216 0.5568
f
f
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Question#95of169 QuestionID:465828
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0.1109 0.2050
0.0745 0.2450
Explanation
TocalculatetheTreynormeasure,usethefollowingformula:
Treynormeasure=(RR )/b
where:
R=return
R =riskfreereturn
b=beta
TheTreynormeasurefortheMirandaFundis:
(0.1020.02)/1.10=0.0745
TheTreynormeasurefortheS&P500is:
(0.2250.02)/1.00=0.2450
BasedontheTreynormeasure,BlakelyoutperformedtheS&P500onariskadjustedbasis(whenriskisdefinedassystematicrisk).TheTreynorratioismeaningfulforportfoliosthatarewelldiversified.(StudySession17,LOS34.p)
WhatistheJensenmeasurefortheMirandaFund?
0.3270.
0.0745.
0.3515.
Explanation
TocalculatetheJensenmeasure,usethefollowingformula:
Jensen'salpha=R [R +b(R R )]
where:
R =returnonactualportfolio
R =riskfreereturn
R =marketreturn
b=betaofportfolio
TheJensenmeasureforMirandaFundis:
0.102[0.02+1.10(0.2250.02)]=0.3515
f
f
a f m f
a
f
m
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Question#96of169 QuestionID:465829
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Question#97of169 QuestionID:465830
Jensen'sAlphameasurestheexcessreturnforagivenlevelofsystematicrisk.Italsomeasuresthevalueaddedofanactivestrategy.Jensen'sAlphaindicatesthattheexcessreturnfortheMirandaFundwas35.15percentagepointsmorethanthereturnimpliedbytheCAPM/SecurityMarketLine.BecauseJensen'sAlphashouldbeusedtocomparewelldiversifiedportfolioshavingthesamebetas,itwouldnotbethebestmeasureforassessingthevalueaddedbyBlakely.(StudySession17,LOS34.p)
Whataretheoneyearassetclassreturns(stocks,cash)forMirandaandthebenchmark?
MirandaFund(stocks,cash)
S&P500(stocks,cash)
18.4%,2% 23.26%,2%
22.4%,2% 23.13%,2%
18.4%,2% 23.10%,3%
Explanation
TocalculatetheoverallactualreturnsfortheMirandaFundandthebenchmarkreturnsforS&P500,usethefollowingformula:
Totalreturn=(W R )
where:
W =weightsofeachindividualassetclass
R =returnsofeachindividualassetclass
Blakelydecidedtoaltertheassetallocationweightsto50%stocksand50%cash.SincetheactualtotalreturnfortheMirandaFundwas10.2%andthecashreturnwas2%,thentheassetclassreturnforstocksis:
0.102=[(0.50R )+(0.500.02)]
0.0920=0.50R
R =0.1840=18.4%
ThereforefortheMirandaFund,theassetclassreturnsforstocksandcashare18.4%and2%respectively.
ThebenchmarkS&P500hadconstantweightsof97%stocksand3%cash.SincetheactualtotalreturnfortheS&P500was22.5%andthecashreturnwas2%,thentheassetclassreturnforstocksis:
0.225=[(0.97R )+(0.030.02)]
0.2256=0.97R
R =0.2326=23.26%
Therefore,fortheS&P500,theassetclassreturnsforstocksandcashare23.26%and2%respectively.(StudySession8,LOS19.n)
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Question#98of169 QuestionID:465831
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Question#99of169 QuestionID:465809
WhatwastheeffectofBlakely'sactivemanagementdecisionontheMirandaFund'soneyearperformance?
20.83%.
32.70%.
11.87%.
Explanation
Activemanagementdecisionsareassumedtogeneratethedifferencebetweentheportfolioandbenchmarkreturns.
A=PB
where:
A=Activemanagementdecision
P=theinvestmentmanager'sportfolioreturn
B=thebenchmarkreturn
A=10.2%&8722(22.5%)=+32.7%.
(StudySession17,LOS34.e)
WhatwastheeffectofBlakely'swithinsectorselectionabilityontheMirandaFund'soneyearperformance?
40.41%.
11.87%.
22.83%.
Explanation
Tocalculatethewithinsectorselectioneffect,usetheformulabelow:
withinsectorselectioneffect=[(w )(R R )]
where:
w =investmentweightgiventotheassetclassinthebenchmarkportfolio
R ,R =investmentreturntotheassetclassinthemanager'sactualportfolioandthebenchmarkportfolio,
respectively
withinsectorselectioneffect=[0.97(0.184(0.2326)]+[0.03(0.020.02)]=0.4041=40.41%
Blakelygainedanadditional40.41%byselectingsecuritiesthatweresuperiortothesecuritieswithinthebenchmark.Thishigherreturnwasattributabletoherstockselectionskillsinpickingspecificstocksthatoutperformedthemarketbenchmark.Thisenabledhertocaptureexcessreturns(alpha)inexcessoftheS&P500benchmark.(StudySession17,LOS34.l)
AnanalysthasgatheredthefollowinginformationabouttheperformanceofanequityfundandtheS&P500indexoverthesametimeperiod.UsingJensen'sAlphatomeasuretherisk/returnperformanceoftheEquityfundandtheS&P500,whichof
Bj Pj Bj
Bj
Pj Bj
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Question#100of169 QuestionID:465740
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Question#101of169 QuestionID:465693
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thefollowingconclusionsisCORRECT?
EquityFund
S&P500
Return 23% 27%
StandardDeviation 15% 19%
Beta 1.09 1.00
Riskfreerateis3.50%
TheS&P500underperformedtheequityfundby2.67%.
TheS&P500outperformedtheequityfundby3.24%.
TheequityfundunderperformedtheS&P500by6.12%.
Explanation
Jensen'sAlpha:0.23[0.035+(0.270.035)1.09]=0.0612or6.12%.ThenegativemeansitunderperformedtheS&P500.
TheSharperatiohasbecomeacommonlyusedperformancemeasureforhedgefunds.WhichofthefollowingstatementsinrelationshiptotheuseoftheSharperatiointheassessmentofhedgefundperformanceisleastaccurate?
Ahedgefund'sSharperatiocanbecomparedtothatofauniverseofsimilarhedgefunds.
Theuseofderivativespositionsinahedgefundremovesmostoftheskewnessinreturnsmakingtheuseofstandarddeviationsappropriate.
TheSharperatioistheexcessreturnstothevolatilityencounteredinearningthem.
Explanation
Itisclearthatforasignificantnumberofhedgefundsreturnsdemonstrateasignificantdegreeofskewnessoftencreatedbytheuseofderivativepositions.Theotherstatementsarecorrect.
TomStovallisaportfoliomanagerwhotrackstheWilshire5000Index.Hereceivedalargecashinflowfromaclientpriortoabullmarket.WhichofthefollowingmostaccuratelycharacterizestherelationshipforthetimeweightedreturnandthemoneyweightedreturnforTom?Thetimeweightedreturnwillbe:
unaffectedbythetimingofthecashinflowandthetimeweightedreturnwillbesmallerthanthemoneyweightedreturn.
inflatedbythetimingofthecashinflowandthetimeweightedreturnwillbelargerthanthemoneyweightedreturn.
unaffectedbythetimingofthecashinflowandthetimeweightedreturnwillbelargerthanthemoneyweightedreturn.
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Question#102of169 QuestionID:465817
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Question#103of169 QuestionID:465750
Explanation
Ifamanagerreceivesalargecashinflowfromaclientpriortoabullmarket,themoneyweightedreturnwillbehigherthanthetimeweightedreturn.Thetimeweightedreturnwillbeunaffectedbythetimingofthecashinflow.
ThefollowingdetailsareavailableforthePrimeGrowthFund,theS&P500(market),andtheU.S.Tbillrate(riskfreerate)forthe5yearperiodfrom1995to2000.
PrimeGrowth S&P500 Tbill
Averageannualrateofreturn
12.00% 9.50% 3.00%
Standarddeviationofreturns
22% 14%
Beta 1.12
Sharperatio 0.41 0.46
Treynormeasure .080 .065
Jensensalpha 0.017
R 0.29
Basedontheresults,wecanconcludethatthePrimeGrowthFund:
containsvirtuallynounsystematicrisk.
seemstohaveunderperformedthemarketbasedontotalriskbasisbutoutperformedthemarketbasedonasystematicriskadjustedbasis.
outperformedthemarketonatotalriskadjustedbasis.
Explanation
TheSharperatioforthePrimeGrowthFundislowerthantheS&P500,hencethefundhasunderperformedthemarketonatotalriskadjustedbasis.TheJensen'salphaispositiveandtheTreynormeasureishigherforthePrimeGrowthFundascomparedtotheS&P500.Hence,PrimeGrowthoutperformedthemarketonasystematicriskadjustedbasis.Also,notethatthefundhasalowR value,meaningthatthefundisnotverywelldiversifiedandlikelycontainsasignificantamountofunsystematicrisk.
Inusingmicroattributionanalysistobreakdowntheperformanceofthemanagerofafund,theanalystfindsthefollowingforaparticularassetclass:
PortfolioWeight 9%
SectorBenchmarkWeight 7%
SectorPortfolioReturn 4%
SectorBenchmarkReturn 3%
2
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Question#104of169 QuestionID:465726
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Questions#105110of169
BenchmarkReturn 0.2%Baseduponthesenumbers,thewithinsectorselectionreturnwouldbe:
0.070%.
0.056%.
0.020%.
Explanation
Themicroattributionbreakdownisbelow:Puresectorallocationreturn:
=[0.090.07][.030.002]=0.056%
Withinsectorselectionreturn:=0.07[.04.03]=0.07%
Allocation/selectioninteractionreturn:=[0.090.07][.04.03]=0.02%
Oneofthepropertiesofavalidbenchmarkisthatitbereflectiveofcurrentinvestmentopinion.Whichofthefollowingisthemostaccurateexplanationofthisproperty?
Themanagershouldhaveknowledgeofthesecuritiesinthebenchmark.
Themanagershouldaccepttheapplicabilityofthebenchmark.
Thesecuritiesinthebenchmarkshouldbethosefavoredbyamajorityofanalysts.
Explanation
Thepropertythatabenchmarkshouldbereflectiveofcurrentinvestmentopinionreferstothefactthatthemanagershouldhaveknowledgeandexpertiseofthesecuritiesinthebenchmark.Thatthemanagershouldaccepttheapplicabilityofthebenchmarkreferstotheaccountablepropertyofavalidbenchmark.
BillCarter,CFAandBobWalters,CFAareanalyzingtherecentreturnofseveralfundstheyhavebeenassignedtomanage.ThefundsareFundA,FundB,FundC,andFundDasindicatedinthetablebelow.
FundA FundB FundC FundD Market
Return 7.80% 7.20% 8.20% 7.60% 7.00%
Beta 1.10 0.90 1.20 1.05 1.00
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Question#105of169 QuestionID:465833
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Question#106of169 QuestionID:465834
ReturnStd.Dev. 4.00% 3.44% 4.15% 3.50% 3.55%
TrackingError* 0.82% 0.45% 1.02% 0.67%
*TrackingerroristhestandarddeviationofthedifferencebetweentheFundReturnandtheMarketIndexReturnTheriskfreerateofreturnfortherelevantperiodwas3.5%.
ThemanagementofthefirmthatCarterandWaltersworksforisveryproudofthefactthatallofthefourfundshadahigherreturnthantheoverallmarketasindicatedonthetable.Thefirm'smanagementwantstoadvertisehow,usingthemarketasabenchmark,thesefundshavehadreturnshigherthanthatbenchmark.Thefirm'smanagementasksCarterandWalterstocomputeseveralperformancemeasuressuchastheTreynormeasure,theSharperatio,andtheM measure.Thefirm'smanagementalsoasksfortheconstructionofqualitycontrolcharts.
Ingoingovertheresults,Carterisskepticaloftheresultsandusingthemarketasabenchmarkbecausethatbenchmarkwasnotspecifiedinadvance.Walterssaysthatheisskepticaltoobecauseitisnotclearifthemarketisanappropriatebenchmarkinallcases.Theywanttoproceedcautiouslybecausethefirm'smanagementrecentlyinstitutedpoliciesformanagercontinuation.Foreachmanager,thefirm'smanagementhassetupthenullhypothesisthatamanagerhasnoskillandthealternativehypothesisisthatthemanagerhasskillinaddingvalue.
CarterandWaltersdiscussconstructingacustombenchmarkforsomeoftheseorotherfundstheymightmanage.Afewofthesefundsholdcashpositionstotakeadvantageofgoodinvestmentopportunitieswhentheyarise.Cartersaysthatthebenchmarktheyconstructshouldincludecashintheweightingscheme.Theysetasideafewweekstoconstructapreliminarybenchmarkforseveralfunds.Walterswantstobethorough,becauseoncetheyconstructthebenchmark,hedoesn'tplantomakeanymodificationstothecustombenchmark.
TheportfoliowiththehighestSharperatiois:
FundC.
FundD.
FundA.
Explanation
TheformulafortheSharperatiois:
ForfundsA,B,C,andD,therespectiveSharperatiosare1.075,1.076,1.134,and1.171.FundDisthehighestcalculatedas:(7.63.5)/3.5=4.1/3.5=1.171.(StudySession17,LOS34.j,p)
WhatistheM measureforfundD?
2
2
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A)
B)
C)
Question#107of169 QuestionID:465835
A)
B)
C)
Question#108of169 QuestionID:465836
A)
B)
C)
Question#109of169 QuestionID:465837
6.76%.
11.26%.
7.66%.
Explanation
TheformulafortheM measureis:
M =7.659%=3.5%+(7.6%3.5%)(3.55%/3.5%).
(StudySession17,LOS34.p)
Ifthereturnsofeachfundwereplottedoveraqualitycontrolchartusingthemarketasabenchmark,thefinalpointofthevalueaddedlinewouldbeabovezero,i.e.,abovethehorizontalaxisfor:
allofthefundsexceptConly.
noneofthefunds.
allofthefunds.
Explanation
Sinceallofthefunds'returnsarehigherthanthebenchmarkfortheperiod,allofthefundswouldhaveapositiveendpointforthecumulativevalueaddedline.(StudySession17,LOS34.r)
WithrespecttothereasonsforCarterandWaltersbeingskepticalofusingthemarketasabenchmark:
bothCarterandWaltersarecorrect.
CarteriswrongandWaltersiscorrect.
bothCarterandWaltersarewrong.
Explanation
Theirobjectionsarebothjustified.Abenchmarkshouldbespecifiedinadvanceanddeemedappropriateforthestyleofthefund.(StudySession17,LOS34.j)
WithrespecttotheconsiderationsthatCarterandWaltersputintopreparingacustombenchmark,includingaweightingforcashandnotmakingmodifications:
2
2PortfolioD
-
A)
B)
C)
Question#110of169 QuestionID:465838
A)
B)
C)
Question#111of169 QuestionID:465762
A)
B)
C)
Question#112of169 QuestionID:465865
A)
B)
CarterandWaltersarebothcorrect.
CarteriswrongandWaltersiscorrect.
CarteriscorrectandWaltersiswrong.
Explanation
Carteriscorrectinthatacustombenchmarkshouldincludeanappropriateweightforcashholdings.Waltersiswronginthatabenchmarkshouldbemodifiedonapresetschedule.(StudySession17,LOS34.l)
ThefirmthatCarterandWaltersworkforhavesetupanullhypothesisforeachmanager.Insuchacase,thefirmwouldmakeatypeIIerrorifit:
firesaskilledmanager.
keepsanunskilledmanager.
hiresasecondmanagertohelpadoubtfulmanager.
Explanation
Inthiscase,weassumeamanagerdoesnotaddvalueandtrytogatherinformationthatthemanagerdoes.Withoutsufficientevidencetoprovevalueisadded,themanagerwouldbefired.Randomnoisecouldleadtothisconclusioneventhoughthemanagerdoesaddvalue.(StudySession17,LOS34.t)
Whatisthetotalvalueadded?
32.70%.
34.70%.
21.26%.
Explanation
totalvalueadded=overallactualfundreturnoverallbenchmarkreturns
=10.2(22.5)=32.70%
Blakely'sMirandaFundwasabletooutperformtheS&P500indexby32.7%.
WhichofthefollowingwouldNOTbeafeatureofawellformulatedmanagercontinuationpolicy?
Underperformance,inanycircumstances,willleadtoautomaticreplacementofthemanager.
Decisionstoreplacemanagersshouldalwaysbetakenonaclearcostbenefitanalysisbasis.
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C)
Questions#113118of169
Question#113of169 QuestionID:485150
Aformalized,writtenmanagercontinuationpolicyincludinggoalsandguidelines.
Explanation
Shortperiodsofunderperformanceshouldnotnecessarilyleadtoautomaticreplacementofthemanager.Underperformanceforconsecutivereviewperiodsshouldputtheplansponsoronnoticeofapotentialproblem.
MaryJohnsonandJaneMeinrodareanalystswithAlphaSystems.Alphaprovidesconsultingservicestoportfoliomanagers,mutualfunds,anddefinedbenefitpensionplans.Alpha'smainserviceisperformancemeasurementandattribution.Alphahasprovidedthisservicetomanagersworldwideformorethanelevenyears.
JohnsonandMeinrodarediscussingtheperformanceofFrankWeinstein.WeinsteinisaportfoliomanagerwhocaterstowealthyclientsinthesuburbsofAtlanta.Manyofhisclientsarequiteanxiousovertherecentdownturninthestockmarketandhavebeensellingstocksasthemarkethasdeclined.Conversely,asmallminorityofclientshavebeenbuyingonthedipsinthemarket,therebyincreasingtheirexposuretostocksasthemarkethasdeclined.ManyofWeinstein'sclientsarequitewealthyandhaveovertenmilliondollarsentrustedtohim.Weinsteinwouldlikehisclientstopursueamorelongtermtradingstrategytoreducetransactionscosts.However,becauseoftheirsubstantialwealth,hedoesnotfeelthathecanobjecttoostronglytotheirdemandsforshorttermtrading.JohnsonstatesthatWeinstein'sperformanceshouldbeevaluatedusingamoneyweightedreturnasthiswouldbethebestgaugeofhisperformance.Meinrodrepliesthattheuseofthemoneyweightedreturnwouldbelessexpensivethanusingatimeweightedreturn.
WeinsteinwouldlikeJohnsonandMeinrodtoevaluatetheperformanceofoneofhislargestclients,ThomasFranklin.TherecordsfortheFranklinportfolioshowthefollowing:onAugust1,theportfoliowasvaluedat$18,600,000,andonAugust16,Franklincontributed$5,000,000totheportfolio.Afterthatcontribution,theportfoliowasvaluedat$26,200,000.OnAugust31,theaccountwasvaluedat$19,400,000.Johnsonreportsthatthisaccountcontainsquiteafewfixedincomesecuritiesandthatthiswillincreasethedifficultyinvaluingthisaccount.Meinrodstatesthata"nexus"approachcanbeusedtodealwithanydifficultiesencounteredinvaluingfixedincomesecurities.
JohnsonandMeinrodarealsoevaluatingtheperformanceofCutterMutualFund.CutterspecializesininvestinginsmallcapstocksfromvariousmarketsinthePacificbasin.BecausefundswithaninvestmentobjectivelikeCutter'saresomewhatuncommon,Cuterhashaddifficultyconstructingavalidbenchmark.Whilediscussingthepropertiesofavalidbenchmark,Johnsonassertsthatabenchmarkshouldbeinvestable,referringtotheabilityofthemanagertoreplicatethesecuritiesinthebenchmark.Meinrodrespondsthatabenchmarkshouldalsoreflectcurrentinvestmentopinion,bywhichshemeansthatthebenchmarkshouldbeinvestedinsecuritiesthatmostmanagerswouldagreeareattractivepurchases.
HavingsettledonavalidbenchmarkfortheCutterFund,JohnsonandMeinrodgatherthefollowingperformancestatisticsforthefund,thebenchmark,andamarketindex:
Cutterportfolio
return 4.90%
Benchmarkreturn 5.20%
Marketindex
return 4.10%
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A)
B)
C)
Question#114of169 QuestionID:485151
A)
B)
C)
Regardingtheanalysts'statementsconcerningtheuseofthemoneyweightedreturnandthetimeweightedreturnforWeinsteinportfolio:
bothanalystsarecorrect.
bothanalystsareincorrect.
Johnsonisincorrect,andMeinrodiscorrect.
Explanation
Johnsonisincorrect.ThediscussionindicatesthatWeinstein'sclientscontrolthecashinflowsandtheoutflowsfortheirportfolios,andtheuseofamoneyweightedreturnwouldresultinanunfairevaluationofWeinstein.Atimeweightedreturnshouldbeusedhere.Meinrodiscorrect.Themoneyweightedreturnislessexpensivetoadministerthanthetimeweightedreturnbecausethetimeweightedreturnwillrequiremorefrequentvaluationsoftheportfolio.(StudySession17,LOS32.c)
WhatarethetimeweightedandmoneyweightedreturnsfortheFranklinaccountduringAugust(assumingcompoundingeveryhalfmonth)?
Thetimeweightedreturnis15.6%andmoneyweightedreturnis19.8%.
Thetimeweightedreturnis4.3%andmoneyweightedreturnis4.3%.
Thetimeweightedreturnis17.8%andmoneyweightedreturnis15.5%.
Explanation
Thetimeweightedreturnis15.6%andmoneyweightedreturnis19.8%.Tocalculatethetimeweightedreturn,firstcalculatethereturnsforeachperiod:
Subperiod1(Days116)
Subperiod2(Days1731)
Compoundingthereturnstogethertocalculateamonthlytimeweightedrateofreturn:
=(1+0.1398)(10.2595)1=0.156=15.6%.
Toobtainthemoneyweightedreturn,wecanuseourfinancialcalculator.Weassumethatcompoundingoccurseveryonehalfmonthbecausethecashflowcomesexactlyinthemiddleofthemonth.UsingtheIRRfunctionontheTIBAIIPlus :
MV =MV (1+R) +CF (1+R)$19,400,000=$18,600,000(1+R) +$5,000,000(1+R)R=10.43%
KeystrokesontheTIBAIIPlus :CF2 CLRWORKCF(0)18,600,000ENTERCF(1)5,000,000ENTERCF(2)19,400,000ENTER
1 0 2 12
nd
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Question#115of169 QuestionID:485152
A)
B)
C)
Question#116of169 QuestionID:465714
A)
B)
C)
Question#117of169 QuestionID:465715
A)
B)
IRRCPT=10.43
Toconvertthishalfmonthreturntoamonthlyreturn,wecompounditovertwoperiods:
MWR=(10.1043) 1=0.1978=19.8%.
(StudySession17,LOS32.c)
ConcerningthevaluationoftheFranklinaccount,JohnsonandMeinrodwere:
Johnson Meinrod
Correct Incorrect
Incorrect Incorrect
Correct Correct
Explanation
Johnsoniscorrect.Fixedincomesecuritiestendtobelessliquidandthiswillmaketheaccountmoredifficulttovalueonaperiodicbasis.Meinrodisincorrect.Theapproachusedtodealwiththeilliquidityofsecuritiesis"matrixpricing."Inmatrixpricing,thepricesavailableforsimilarfixedincomesecuritiesaresubstitutedforthepricesofbondsintheportfolio.(StudySession17,LOS32.c)
ThestatementsJohnsonandMeinrodmadeconcerningtheuseofavalidbenchmarkfortheCutterfundwere:
Johnson Meinrod
Correct Correct
Correct Incorrect
Incorrect Incorrect
Explanation
Johnsoniscorrect.Abenchmarkshouldbeinvestable,whichmeanthatthemanagershouldbeabletoreplicatethesecuritiesinthebenchmark.Meinrodisincorrect.Althoughabenchmarkshouldbereflectiveofcurrentinvestmentopinion,thispropertydoesnotmeanthatamajorityofinvestorswouldfavorthesecuritiesinthebenchmark.Insteaditmeansthatthemanagercancategorizethesecuritiesthatcomposethebenchmark(e.g.,value,growth,highyield.)andhasanopinionregardingtheirattractivenessasaninvestment.Thisopinioncanbepositive,negative,orneutral.(StudySession17,LOS34.f)
WhatistheportionofCutter'sreturnduetoactivemanagement?
1.10%.
0.30%.
2
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C)
Question#118of169 QuestionID:465716
A)
B)
C)
Question#119of169 QuestionID:465731
A)
B)
C)
Question#120of169 QuestionID:465780
A)
B)
C)
0.80%.
Explanation
TheportionofCutter'sreturnduetoactivemanagementistheportfolioreturnminusthereturnonthebenchmark:4.90%5.20%=0.30%.(StudySession17,LOS34.e)
WhatistheportionofCutter'sreturnduetostyle?
0.30%.
1.10%.
0.80%.
Explanation
TheportionofCutter'sreturnduetostyleisthebenchmarkreturnminusthemarketindexreturn:5.20%4.10%=1.10%.(StudySession17,LOS34.e)
Whichofthefollowingisleastlikelytobeastepintheconstructionofacustomsecuritybasedbenchmark?
Rebalancetheportfolioonaperiodicbasis.
Minimizemisfitriskforthebenchmark.
Usethesameassetsforthebenchmarkasthemanager.
Explanation
Misfitriskresultsfromdifferencesbetweenthemanager'snormalportfolioandthebroaderassetclassbenchmark.Inacustomsecuritybasedbenchmark,therewillbeandshouldbemisfitriskifthemanager'sstyleisdifferentthanthebroadmarketandifthecustombenchmarkaccuratelyreflectsthemanager'sstyle.
Whichofthefollowingleastaccuratelycharacterizesfundamentalfactormodelattributionandallocation/selectionattribution?
Allocation/selectionattributioncanleadtospuriouscorrelations.
Securityweightsneedtobedeterminedat