11 evaluating portfolio performance

TestID:7427843EvaluatingPortfolioPerformance

Question#1of169 QuestionID:465743

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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.

C)

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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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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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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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%.

Questions#1213of169


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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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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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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


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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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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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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


period.

EquityFundS&P500

Return12%16%


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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


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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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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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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.

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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.

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Questions#3944of169


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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


A)

B)

C)


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




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


TotalFund $221,318,507 4.83% $11,318,507


WhatwastheincrementalpercentagereturncontributionattributabletoAssetCategory?

4.02%.

4.00%.

4.94%.

Explanation



A)

B)

C)


A)



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



TotalFund $221,318,507 4.83% $11,318,507


Whatwastheincrementalpercentagereturncontributionattributabletobenchmarks?

0.30%.

0.03%.

0.31%.

Explanation




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



TotalFund $221,318,507 4.83% $11,318,507


WhatwastheincrementalpercentagereturncontributionattributabletoInvestmentManagers?

0.500%.

B)

C)


A)

B)

C)

0.050%.

0.053%.

Explanation




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



TotalFund $221,318,507 4.83% $11,318,507


Whatwastheincrementalpercentagereturncontributionattributabletoallocationeffects?

0.080%.

0.800%.

0.084%.

Explanation




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




A)

B)

C)


A)

B)

C)

Questions#4748of169

TotalFund $221,318,507 4.83% $11,318,507


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.


A)

B)

C)


A)

B)

C)

CurrentlyMichaelsisworkingonanevaluationoftheAMGlargecapitalizationgrowthfundandhasassembledthefollowingoneyearreturninformation.

AMGFund S&P500

Return 14% 12%


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


A)

B)

C)


A)

B)

C)


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

A)

B)

C)


A)

B)

C)


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.


A)

B)

C)


A)

B)

C)


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

C)

Questions#5759of169


A)

B)

C)


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,Dixon,Winterburn,Bould.

2

C)


A)

B)

C)


A)

B)

C)


Explanation


UsingtheSharpeMeasure,rankthefourfundsintermsoftheriskadjustedexcessreturnsstartingwiththehighestperformingfundandendingwiththelowestperformingfund:



Adams,Bould,Winterburn,Dixon.

Explanation


IfHillusestheSharpemeasureashischosenperformancemeasure,whichportfoliowouldheadd?

ManagerC.

ManagerB.

ManagerA.

Explanation

PortfolioManager Return Beta Standard Sharpe


A)

B)

C)


A)

B)

C)


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

A)

B)

C)


A)

B)

C)


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


A)

B)

C)

Questions#6768of169


A)

B)

C)


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

B)

C)

Questions#6970of169


A)

B)

C)


A)

B)

C)


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

A)

B)

C)

Questions#7274of169


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


A)

B)

C)


A)

B)

C)


A)

B)

C)


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


A)

B)

C)


A)

B)

C)


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.


period.

EquityFundS&P500

Return32%26%


A)

B)

C)


A)

B)

C)

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.


A)

B)

C)


A)

B)

C)


A)

B)

C)


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%.

A)

B)

C)


A)

B)

C)


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%

A)

B)

C)


A)

B)

C)


A)

B)

C)

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.


A)

B)

C)

Questions#9091of169


A)

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%.


A)

B)

C)


A)

B)

C)

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


A)

B)

C)


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

B)

C)


A)

B)

C)

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


A)

B)

C)


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)

i i

i

i

i

i

i

i

i

I

A)

B)

C)


A)

B)

C)


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

A)

B)

C)


A)

B)

C)


A)

B)

C)

thefollowingconclusionsisCORRECT?

EquityFund

S&P500

Return 23% 27%


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.


A)

B)

C)


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

2

A)

B)

C)


A)

B)

C)

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


A)

B)

C)


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

A)

B)

C)


A)

B)

C)


A)

B)

C)


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)


A)

B)

C)


A)

B)

C)


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.

C)

Questions#113118of169


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%

A)

B)

C)


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%.



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


A)

B)

C)


A)

B)

C)


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

C)


A)

B)

C)


A)

B)

C)


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

11 evaluating portfolio performance

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