CFA LEVEL-II, PRACTICE QUESTIONS Reading # 32: Evaluating Portfolio Performance | Solutions Question - #91546 Your answer: A was correct! The property that a benchmark should be reflective of current investment opinion refers to the fact that the manager should have knowledge and expertise of the securities in the benchmark That the manager should accept the applicability of the benchmark refers to the accountable property of a valid benchmark This question tested from Session 17, Reading 32, LOS f Question - #91455 Part 1) Your answer: B was incorrect The correct answer was C) Adams, Bould, Dixon, Winterburn Thus the ranking is 1) Adams 2) Bould 3) Dixon 4) Winterburn This question tested from Session 17, Reading 32, LOS p Part 2) Your answer: B was incorrect The correct answer was C) Adams, Bould, Dixon, Winterburn Thus the ranking is 1) Adams 2) Bould 3) Dixon 4) Winterburn This question tested from Session 17, Reading 32, LOS p Part 3) Your answer: B was correct! Thus the ranking is 1) Adams 2) Bould 3) Dixon 4) Winterburn This question tested from Session 17, Reading 32, LOS p Question - #93049 Your answer: B was incorrect The correct answer was C) The equity fund underperformed the S&P 500 by 6.12% Jensen’s Alpha: 0.23 – [0.035 + (0.27 – 0.035)1.09] = -0.0612 or -6.12% The negative means it underperformed the S&P 500 This question tested from Session 17, Reading 32, LOS p Question - #92713 Your answer: B was correct! Return = 8% = ($108,000 − $100,000)/$100,000 The Asset Category investment strategy assumes that the Fund’s beginning value and external cash flows are invested passively in a combination of the designated asset category benchmarks, with the specific allocation to each benchmark based on the fund sponsor’s policy allocation to those asset categories In essence, this approach is a pure index fund approach The asset category corresponds to a pure index approach The dollar return would have been $8,000 or 8% on the initial $100,000 This question tested from Session 17, Reading 32, LOS l Question - #91469 Your answer: B was incorrect The correct answer was A) Value-added returns are independent from period to period and normally distributed The null hypothesis states that the expected value-added return is zero We are testing the manager’s ability to generate positive expected value added returns We want a consistent process to ensure that the distribution of value added returns about their mean is constant We indeed assume that valueadded returns are independent from one period to the next and normally distributed This question tested from Session 17, Reading 32, LOS r Question - #92769 Your answer: B was correct! There are seven properties of a valid benchmark With regard to the median account approach, its value is measurable This is probably the only criteria that the median manager approach satisfies The other statements are true of the median account This question tested from Session 17, Reading 32, LOS h Question - #91483 Your answer: B was incorrect The correct answer was C) The Sharpe ratio measures the slope of the capital allocation line (CAL), with the lowest slope having the most desirable risk/return combination Although it is true that the Sharpe ratio measures the slope of the CAL, the higher the slope the more desirable the portfolio Your goal is to select the portfolio that has the highest Sharpe measure, which will also have the steepest slope At any given risk level, the higher the slope the greater the return This question tested from Session 17, Reading 32, LOS p Question - #93048 Your answer: B was correct! Performance evaluation is more than a simple exercise in calculating rates of return Rather, it provides an exhaustive “quality control” check, emphasizing not only the performance of the fund and its constituent parts relative to objectives, but the sources of that relative performance as well This question tested from Session 17, Reading 32, LOS a Question - #91494 Your answer: B was incorrect The correct answer was A) return per unit of domestic currency The time-weighted return measures the return per unit of domestic currency The calculation involves taking a geometric average of the returns of the various sub-periods This question tested from Session 17, Reading 32, LOS c Question 10 - #93172 Your answer: B was incorrect The correct answer was C) statistically significant excess returns In portfolio management, quality control charts are used to determine if a manager has statistically significant excess returns The manager’s returns versus a benchmark are plotted on a graph where time is on the x-axis and value-added (excess) return is plotted on the y-axis A confidence interval is formed around the x-axis of zero If the manager’s returns plot outside the confidence interval, we conclude that the manager has generated statistically significant excess returns This question tested from Session 17, Reading 32, LOS r Question 11 - #92996 Your answer: B was incorrect The correct answer was A) the feedback step of the investment management process Performance valuation is part of the feedback step This question tested from Session 17, Reading 32, LOS a Question 12 - #91462 Your answer: B was incorrect The correct answer was C) If returns are consistently above the horizontal axis this would indicate superior performance on the part of the manager under review In order to determine statistical significance or otherwise, confidence intervals need to be constructed using the standard deviation of the returns Simply looking at the manager's value added returns above horizontal line alone does not tell you if the returns are significant or random This question tested from Session 17, Reading 32, LOS r Question 13 - #92373 Your answer: B was incorrect The correct answer was C) Value added return is simply the difference between the portfolio return and the benchmark return To replicate a zero net asset hedge fund the weights must add to zero Calculation of return is achieved by summing the individual long and short positions and the value added return is the difference between the portfolio return and the benchmark return This question tested from Session 17, Reading 32, LOS j Question 14 - #91547 Your answer: B was incorrect The correct answer was C) Relative performance comparisons with traditional benchmarks Construct a separate long and short benchmark, which can then be combined together in their relevant proportions The Sharpe ratio compares the return to risk free rather than a benchmark Relative performance using traditional benchmarks is the least appropriate given hedge funds concentration on absolute returns and the lack of reliable traditional benchmarks This question tested from Session 17, Reading 32, LOS j Question 15- #91457 Your answer: B was incorrect The correct answer was A) penalizes managers for cash flows that occur outside of their control The money-weighted return computation penalizes managers for cash flows that occur outside of their control This question tested from Session 17, Reading 32, LOS c Question 16 - #91513 Your answer: B was incorrect The correct answer was A) and and Changes in forward rates and the return on the default free benchmark are outside of the manager’s influence and are therefore part of the external interest environment Interest rate management and trading activity are an integral part of the role of the manager and are therefore part of the management process Remember we could also include return from sector/quality management and return from the selection of specific securities This question tested from Session 17, Reading 32, LOS n Question 17 - #92876 Your answer: B was incorrect The correct answer was C) Account valuations use trade date accounting as opposed to settlement accounting The use of trade date accounting is regarded to be a key feature of a good return measurement process The other options are examples of the problems caused when illiquid assets are included in the account Matrix pricing is using the quoted price of a similar asset as a proxy for the market value of thinly traded fixed income securities This question tested from Session 17, Reading 32, LOS d Question 18 - #93149 Your answer: B was correct! The overall benchmark return = 6.705% The sector effect = Σ[(portfolio wt – bench wt.)(bench sector return – bench overall return)] = [(0.625 − 0.500)(8.64 − 6.705)] + [(0.250 − 0.333)(5.92 − 6.705)] + [(0.125 − 0.167)(2.47 − 6.705)] = 0.485% This question tested from Session 17, Reading 32, LOS l Question 19 - #91622 Your answer: B was correct! The benchmark has seven characteristics All of the above are included with the exception of ‘reflective of past investment opinion,’ it should be reflective of current investment opinion, and the manager should have current knowledge and expertise of the securities in the benchmark This question tested from Session 17, Reading 32, LOS f Question 20 - #91608 Your answer: B was incorrect The correct answer was A) 0.397% The within-sector selection effect = Σ[(benchmark weight)(fund segment return – bench segment return)] = [(0.5)(9.85 − 8.64)] + [(0.333)(5.34 − 5.92)] + [(0.167)(2.38 − 2.47)] = 0.397% This question tested from Session 17, Reading 32, LOS l Question 21 - #91506 Your answer: A was incorrect The correct answer was B) This is a two-tailed test The test is set up as null, the manager generates no added value and the alternative is that the manager adds value So we are looking for positive added value which is a one-tailed test Therefore, the alternative will be that the manager generates positive value added This question tested from Session 17, Reading 32, LOS t Question 22 - #93135 Your answer: B was correct! Understanding how a return was earned is very important so that the manager can know if the fund had the correct exposures as specified in the IPS This question tested from Session 17, Reading 32, LOS a Question 23 - #92696 Your answer: B was incorrect The correct answer was C) macro evaluation is an incremental approach and micro evaluation focuses on deviations from benchmarks This is the most correct statement The macro evaluation looks at the beginning and ending values of the entire fund and attributes the return contributed at each level of decision making Micro evaluation looks at individual portfolios and tries to explain its return with respect to its deviation from a benchmark This question tested from Session 17, Reading 32, LOS l Question 24 - #93125 An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index Your answer: B was incorrect The correct answer was C) 0.07 The equity fund: (-0.12 – 0.06)/1.18 = -0.15 The S&P 500: (-0.16 – 0.06)/1.00 = -0.22 The equity fund is (-0.15 – (-0.22) = 0.07 higher This question tested from Session 17, Reading 32, LOS p Question 25 - #100903 Your answer: B was incorrect The correct answer was A) The denominator of the Sharpe ratio is standard deviation which is comprised partly of systematic risk called beta The equation for the Sharpe ratio = (RP − RF) / σP The Sharpe ratio contains standard deviation in the denominator of the equation which is total risk and is comprised of both systematic risk called beta and unsystematic risk thus the Sharpe ratio does contain a component of beta This question tested from Session 17, Reading 32, LOS q Question 26 - #91453 Your answer: B was correct! The time-weighted return computation requires computation of return every time a cash flow occurs One of the advantages of the time-weighted return is that passive benchmarks use the same calculation methodology which makes it comparable to passive benchmarks and other portfolio managers This question tested from Session 17, Reading 32, LOS c Question 27 - #92739 Part 1) Your answer: B was incorrect The correct answer was A) 0.2216 -0.5568 To calculate the Sharpe ratio, use the following formula: Sharpe ratio = (R – Rf) /σ where: R = return Rf = risk-free return σ = standard deviation The Sharpe ratio for the Miranda Fund is: (0.102-0.02)/0.37 = 0.2216 The Sharpe ratio for the S&P 500 is: (-0.225 – 0.02) /0.44 = -0.5568 Based on the Sharpe ratio, Blakely outperformed the S&P 500 on a risk-adjusted basis (when risk is defined as total risk) The Sharpe ratio is best for portfolios with large amounts of unsystematic risk (Study Session 17, LOS 41.p) This question tested from Session 17, Reading 32, LOS p Part 2) Your answer: B was incorrect The correct answer was A) 0.0745 -0.2450 To calculate the Treynor measure, use the following formula: Treynor measure = (R –Rf) / b where: R = return Rf = risk-free return b = beta The Treynor measure for the Miranda Fund is: (0.102 -0.02)/1.10 = 0.0745 The Treynor measure for the S&P 500 is: (-0.225 – 0.02)/1.00 = -0.2450 Based on the Treynor measure, Blakely outperformed the S&P 500 on a risk-adjusted basis (when risk is defined as systematic risk) The Treynor ratio is meaningful for portfolios that are welldiversified (Study Session 17, LOS 41.p) This question tested from Session 17, Reading 32, LOS p Part 3) Your answer: B was incorrect The correct answer was C) 0.3515 To calculate the Jensen measure, use the following formula: Jensen’s alpha = Ra – [Rf + b(Rm – Rf)] where: Ra = return on actual portfolio Rf = risk-free return Rm = market return b = beta of portfolio The Jensen measure for Miranda Fund is: 0.102 – [0.02 + 1.10(–0.225 – 0.02)] = 0.3515 Jensen’s Alpha measures the excess return for a given level of systematic risk It also measures the value added of an active strategy Jensen’s Alpha indicates that the excess return for the Miranda Fund was 35.15 percentage points more than the return implied by the CAPM/Security Market Line Because Jensen’s Alpha should be used to compare well-diversified portfolios having the same betas, it would not be the best measure for assessing the value added by Blakely (Study Session 17, LOS 41.p) This question tested from Session 17, Reading 32, LOS p Part 4) Your answer: B was incorrect The correct answer was A) 18.4%, 2% -23.26%, 2% To calculate the overall actual returns for the Miranda Fund and the benchmark returns for S&P 500, use the following formula: Total return = ∑ (Wi × Ri) where: Wi = weights of each individual asset class R i = returns of each individual asset class Blakely decided to alter the asset allocation weights to 50% stocks and 50% cash Since the actual total return for the Miranda Fund was 10.2% and the cash return was 2%, then the asset class return for stocks is: 0.102 = [(0.50 × Ri) + (0.50 × 0.02)] 0.0920 = 0.50 Ri Ri = 0.1840 = 18.4% Therefore for the Miranda Fund, the asset class returns for stocks and cash are 18.4% and 2% respectively The benchmark S&P 500 had constant weights of 97% stocks and 3% cash Since the actual total return for the S&P 500 was –22.5% and the cash return was 2%, then the asset class return for stocks is: –0.225 = [(0.97 × Ri) + (0.03 × 0.02)] –0.2256 = 0.97 Ri RI = –0.2326 = - 23.26% Therefore, for the S&P 500, the asset class returns for stocks and cash are –23.26% and 2% respectively (Study Session 8, LOS 21.n) This question tested from Session 17, Reading 32, LOS p Part 5) Your answer: B was correct! Active management decisions are assumed to generate the difference between the portfolio and benchmark returns A=P−B where: A = Active management decision P = the investment manager's portfolio return B = the benchmark return A = 10.2% − ( -22.5%) = +32.7% (Study Session 17, LOS 41.e) This question tested from Session 17, Reading 32, LOS p Part 6) Your answer: A was incorrect The correct answer was C) 40.41% To calculate the within-sector selection effect, use the formula below: within-sector selection effect = ∑ [(wBj) × (RPj – RBj)] where: wBj = investment weight given to the asset class in the benchmark portfolio RPj, RBj = investment return to the asset class in the manager’s actual portfolio and the benchmark portfolio, respectively within-sector selection effect = [0.97 × (0.184 – (–0.2326)] + [0.03 × (0.02 – 0.02)] = 0.4041 = 40.41% Blakely gained an additional 40.41% by selecting securities that were superior to the securities within the benchmark This higher return was attributable to her stock selection skills in picking specific stocks that outperformed the market benchmark This enabled her to capture excess returns (alpha) in excess of the S&P 500 benchmark (Study Session 17, LOS 41.l) This question tested from Session 17, Reading 32, LOS p Question 28 - #93017 Your answer: B was incorrect The correct answer was C) the manager’s style may deviate from the style reflected in the benchmark The manager’s style may deviate from the style reflected in the benchmark is a weakness of broad based market indexes not factor-model-based benchmarks The other statements are regarded to be disadvantages of factor-model-based benchmarks This question tested from Session 17, Reading 32, LOS f Question 29 - #93006 Your answer: B was correct! The manager earned a return from style, where the style return is the benchmark return minus the market return (6.30% − 4.30% = 2.00%) The manager did not earn a return from active management, where the active return is the manager’s return minus the benchmark return (5.20% − 6.30% = -1.10%) This question tested from Session 17, Reading 32, LOS e Question 30 - #100904 Your answer: B was incorrect The correct answer was A) Treynor measure The equations for the measures are as follows: Treynor measure = (RP − RF) / βP Sharpe ratio = (RP − RF) / σP Information ratio = (RP − RB) / (σP − B) The goal is to add a greater return to the portfolio without appreciably increasing the level of risk Since the portfolio is already well diversified most of its risk is related to systematic risk (beta) which is the relevant measure of risk in the denominator of the Treynor measure Adding one risky stock to an already diversified portfolio will not appreciably change the overall risk of the portfolio thus beta and the Treynor measure remain the relevant measures used to compare the results of the portfolio with and without the addition of the stock The Sharpe ratio uses standard deviation in the denominator of the equation Standard deviation is comprised of systematic risk (beta) and unsystematic risk If the portfolio was not well diversified then most of the risk would be unsystematic or company specific risk Adding one stock to an undiversified portfolio would most likely still leave a lot of unsystematic risk thus making standard deviation and the Sharpe ratio the relevant measures if the portfolio was undiversified The information ratio is used to compare the return to a benchmark which is not a concern to the portfolio manager in this question This question tested from Session 17, Reading 32, LOS q Question 31 - #93154 Your answer: B was incorrect The correct answer was A) 0.25 and 1.25 Treynor measure: (0.29 – 0.04)/1.00 = 0.25 Sharpe ratio: (0.29 – 0.04)/0.20 = 1.25 This question tested from Session 17, Reading 32, LOS p Question 32 - #93124 Your answer: B was incorrect The correct answer was C) Tactical asset allocations There are three main inputs into the macro attribution approach: 1) policy allocations 2) benchmark portfolio returns and 3) fund returns, valuations and external cash flows This question tested from Session 17, Reading 32, LOS k Question 33 - #91488 Your answer: B was incorrect The correct answer was C) Jensen's Alpha Jensen’s Alpha measures the value added of an active portfolio strategy This question tested from Session 17, Reading 32, LOS p Question 34 - #91510 Your answer: B was correct! To calculate the M-squared ratio for Cumulus, use the following formula: We would compare the 13.51% to the return on the market of 12% and conclude that the Cumulus Fund has superior performance Using the same formula as above, the M-squared measure for the Saturn fund is 14.65%, which indicates that the Saturn fund has superior performance relative to both the market and Cumulus fund The Treynor ratio for Cumulus would be calculated as: The Treynor ratio for the Saturn fund is 10.6, which indicates that the Cumulus fund has superior performance relative to the Saturn fund The discrepancy between the two measures is because the M-squared measure uses the standard deviation (total risk) as the measure of risk whereas the Treynor ratio uses beta (systematic risk) The Cumulus fund is poorly diversified relative to the Saturn fund When unsystematic risk is captured in the M-squared measure, the Cumulus fund is not as attractive as the Saturn fund This question tested from Session 17, Reading 32, LOS p Question 35 - #93122 Your answer: B was incorrect The correct answer was A) Pure sector allocation effects Pure sector allocation effects result from micro performance evaluation The inputs to macro performance evaluation include policy allocations, benchmark portfolio returns, fund returns, fund valuations, and external cash flows This question tested from Session 17, Reading 32, LOS k Question 36 - #91505 Your answer: B was incorrect The correct answer was A) Jensen is likely committing Type I error and Mercer is likely committing Type II error Type I error is retaining (or hiring) a poorly performing manager Jensen is likely committing Type I error because he rarely fires anyone Type II error is firing (or not hiring) a superior manager Jensen is likely committing Type II error because he fires managers after only two quarters of underperformance Two quarters is not enough time to properly evaluate a manager This question tested from Session 17, Reading 32, LOS t Question 37 - #91474 Your answer: B was incorrect The correct answer was A) tolerate more Type I error to reduce Type II error Type I error is retaining a poor manager and Type II error is firing a superior manager If a firm wishes to reduce the costs of hiring and firing managers, then they should reduce staff turnover So they should err on the side of retaining poor managers (Type I error) to reduce the chance of firing superior managers (Type II error) They might this by relaxing the performance criteria managers must meet This question tested from Session 17, Reading 32, LOS s Question 38 - #91437 Your answer: B was incorrect The correct answer was A) Manager C Portfolio Manager Return Beta Standard Deviation Sharpe 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 This question tested from Session 17, Reading 32, LOS p Question 39 - #92715 Your answer: B was incorrect The correct answer was C) are not a valid benchmark because they are not investable Manager universes are not a valid benchmark because they are not investable, are not specified in advance, and are not unambiguous It is also impossible to determine if they are appropriate due to the ambiguity of the median manager Furthermore, the performance records of poor managers are dropped from manager universes so there is an upward bias (i.e., survivorship bias) where the median manager’s return is inflated The only property of a valid benchmark that manager universes fulfill is that they are measurable This question tested from Session 17, Reading 32, LOS h Question 40 - #92798 Your answer: B was incorrect The correct answer was A) 0.070% The micro attribution breakdown is below: Pure sector allocation return: = [0.09 – 0.07] × [.03 – 0.002] = 0.056% Within sector selection return: = 0.07 × [.04 – 03] = 0.07% Allocation/selection interaction return: = [0.09 – 0.07] × [.04 – 03] = 0.02% This question tested from Session 17, Reading 32, LOS l Question 41 - #91459 Part 1) Your answer: B was incorrect The correct answer was C) 3.529 14.881% Quarterly Return = [(1 + R1) × (1 + R2) × × (1 + RN)]1/N − Quarterly Return = [(1.0463)(1.0089)(1.0738)(1.0135)]1/4 − = 3.529% Annual Return = (1 + average subperiod return)# of subperiods per year − Annual Return = (1.03529)4 − = 0.14881 or 14.881% This question tested from Session 17, Reading 32, LOS c Part 2) Your answer: B was incorrect The correct answer was C) 1.654% 6.783% Quarterly Return = [(1 + R1) x (1 + R2) × × (1 + RN)]1/N − Quarterly Return = [(1.0195)(1.0115)(1.0207)(1.0145)]1/4 − = 1.654% Annual Return = (1 + average subperiod return)# of subperiods per year − Annual Return = (1.01654)4 − = 0.06783 or 6.783% This question tested from Session 17, Reading 32, LOS c Question 42 - #91509 Your answer: B was incorrect The correct answer was C) a lack of diversification in Fund A as compared to Fund D The most likely reason for a difference in ranking is due to the absence of diversification in Fund A The Sharpe ratio measures excess return per unit of total risk, while the Treynor ratio measures excess return per unit of systematic risk Since Fund A performed well on the Treynor measure and so poorly on the Sharpe measure, it seems that the fund carries a greater amount of unsystematic risk, meaning it is not well diversified and systematic risk is not the relevant risk measure This question tested from Session 17, Reading 32, LOS p Question 43 - #93143 Your answer: C was correct! The equity fund Sharpe ratio: (0.32 – 0.06)/0.41 = 0.63 The S&P 500 Sharpe ratio: (0.26 – 0.06)/0.29 = 0.69 The equity fund is (0.63 – 0.69) = -0.06 lower This question tested from Session 17, Reading 32, LOS p Question 44 - #93039 Your answer: B was incorrect The correct answer was A) They help fund sponsors better understand a manager’s investment style, by capturing factor exposures Helping fund sponsors better understand a manager’s investment style, by capturing factor exposures is an advantage of factor models and not style indexes The other statements are true in the context of style indexes This question tested from Session 17, Reading 32, LOS f Question 45 - #91493 Your answer: A was correct! Performance attribution seeks to identify the sources of difference between portfolio and benchmark return Note that performance measurement involves the calculation of risk and return, while performance appraisal seeks to identify whether returns are a result of a manager’s luck or skill This question tested from Session 17, Reading 32, LOS b Question 46 - #100901 Your answer: B was incorrect The correct answer was C) Treynor measure The equations for the measures are as follows: Treynor measure = (RP − RF) / βP Sharpe ratio = (RP − RF) / σP Information ratio = (RP − RB) / (σP − B) Since both portfolios are well diversified most of their risk comes from systematic risk or beta and is tied to the general level of overall risk in the market In this case the best measure to use would be the Treynor measure since this uses beta or systematic risk as the measure of risk The Sharpe ratio uses standard deviation as the measure of risk in the denominator and the information ratio is best to use when comparing a portfolio to a benchmark This question tested from Session 17, Reading 32, LOS q Question 47 - #92733 Your answer: B was correct! The results will indicate the source of portfolio returns, based upon actual factor exposures (not benchmark) versus the manager’s normal factor exposures Both of the other statements are true in the context of fundamental factor model micro attribution This question tested from Session 17, Reading 32, LOS m Question 48 - #91502 Your answer: B was incorrect The correct answer was A) Underperformance, in any circumstances, will lead to automatic replacement of the manager Short periods of underperformance should not necessarily lead to automatic replacement of the manager Underperformance for consecutive review periods should put the plan sponsor on notice of a potential problem This question tested from Session 17, Reading 32, LOS s Question 49 - #91489 Your answer: B was incorrect The correct answer was A) The security market line (SML) represents an active investment strategy when Jensen's Alpha is used as the measure for portfolio performance The SML is a passive strategy in that the investor invests in a combination of the market portfolio and the risk free asset Jensen’s Alpha measures the value added return due to active management This question tested from Session 17, Reading 32, LOS p Question 50 - #93018 Part 1) Your answer: B was correct! Sharpe measure for active portfolio = (0.50 − 0.06)/0.18 = 2.44 Treynor measure for active portfolio = (0.50 − 0.06)/1.1 = 0.40 Alpha for active portfolio = 0.50 − [0.06+(0.20 − 0.06) × 1.1)] = 0.29 This question tested from Session 17, Reading 32, LOS p 6% Part 2) Your answer: B was correct! Sharpe measure for S&P portfolio = (0.20 − 0.06)/0.15 = 0.93 Treynor Measure for S&P portfolio = (0.20 − 0.06)/1.0 = 0.14 Alpha for S&P portfolio = Hence, the portfolio manager outperforms based on all the three performance evaluation methods This question tested from Session 17, Reading 32, LOS p Question 51 - #91504 Your answer: B was correct! Type I error is retaining a poorly performing manager If the confidence intervals are widened and a poor manager is barely outperforming the benchmark, it is less likely that they will have statistically significant excess returns We are thus more likely to fire them and hence less likely to commit Type I error At the same time, we may be firing good managers who are outperforming the benchmark but yet not have statistically significant excess returns We are thus more likely to commit Type II error as Type II error is firing a superior manager This question tested from Session 17, Reading 32, LOS t Question 52 - #92687 Your answer: B was incorrect The correct answer was C) A manager’s active returns should be uncorrelated with the manager’s investment style A manager’s active returns should be uncorrelated with the manager’s investment style This question tested from Session 17, Reading 32, LOS i Question 53 - #91548 Your answer: B was incorrect The correct answer was C) The use of derivatives positions in a hedge fund removes most of the skewness in returns making the use of standard deviations appropriate It is clear that for a significant number of hedge funds returns demonstrate a significant degree of skewness often created by the use of derivative positions The other statements are correct This question tested from Session 17, Reading 32, LOS j Question 54 - #91473 Part 1) Your answer: B was incorrect The correct answer was A) +0.1417 Treynor’s measure = (Return – risk free rate) / beta = (0.22 − 0.05) / 1.2 = 0.1417 This question tested from Session 17, Reading 32, LOS p Part 2) Your answer: B was incorrect The correct answer was C) +0.5667 Sharpe ratio = (Return – risk free rate) / std deviation = (0.22 − 0.05) / 0.30 = 0.5667 This question tested from Session 17, Reading 32, LOS p Question 55 - #91466 Your answer: B was incorrect The correct answer was C) 2.77% 2.80% If the receipt was at the beginning of the period then: If the receipt was at the end of the period then: This question tested from Session 17, Reading 32, LOS b Question 56 - #92992 Your answer: B was correct! Value added return = Portfolio return – Benchmark return This question tested from Session 17, Reading 32, LOS l Question 57 - #91464 Your answer: B was incorrect The correct answer was C) If an external cash flow is received at the beginning of a period then the market value at this point is adjusted to include that cash flow, it is added to the opening market value of the fund and it is added to the denominator In this way, the return measure reflects the return on the funds under management during the measurement period This question tested from Session 17, Reading 32, LOS b Question 58 - #91490 Part 1) Your answer: B was incorrect The correct answer was A) Johnson is incorrect, and Meinrod is correct Johnson is incorrect The discussion indicates that Weinstein’s clients control the cash inflows and the outflows for their portfolios, and the use of a money-weighted return would result in an unfair evaluation of Weinstein A time-weighted return should be used here Meinrod is correct The money-weighted return is less expensive to administer than the time-weighted return because the time-weighted return will require more frequent valuations of the portfolio (Study Session 17, LOS 41.c) This question tested from Session 17, Reading 32, LOS c Part 2) Your answer: B was correct! The time-weighted return is –15.6% and money-weighted return is –19.8% To calculate the time-weighted return, first calculate the returns for each period: Subperiod (Days 1-16) Subperiod (Days 17-31) Compounding the returns together to calculate a monthly time weighted rate of return: = (1 + 0.1398)(1 – 0.2595) – = –0.156 = –15.6% To obtain the money weighted-return, we can use our financial calculator We assume that compounding occurs every one-half month because the cash flow comes exactly in the middle of the month Using the IRR function on the TI BAII Plus®: MV1 = MV0(1+R)2 + CF1(1+R) $19,400,000 = $18,600,000 (1+R)2 + $5,000,000 (1+R) R = –10.43% Keystrokes on the TI BAII Plus®: CF 2nd CLR WORK CF(0) 18,600,000 ENTER ↓ CF(1) 5,000,000 ENTER ↓↓ CF(2) -19,400,000 ENTER IRR CPT = -10.43 To convert this half-month return to a monthly return, we compound it over two periods: MWR = (1 – 0.1043)2 – = –0.1978 = –19.8% (Study Session 17, LOS 41.c) This question tested from Session 17, Reading 32, LOS c Part 3) Your answer: B was incorrect The correct answer was C) Correct Incorrect Johnson is correct Fixed-income securities tend to be less liquid and this will make the account more difficult to value on a periodic basis Meinrod is incorrect The approach used to deal with the illiquidity of securities is “matrix pricing.” In matrix pricing, the prices available for similar fixedincome securities are substituted for the prices of bonds in the portfolio (Study Session 17, LOS 41.c) This question tested from Session 17, Reading 32, LOS c Part 4) Your answer: A was correct! Johnson is correct A benchmark should be investable, which mean that the manager should be able to replicate the securities in the benchmark Meinrod is incorrect Although a benchmark should be reflective of current investment opinion, this property does not mean that a majority of investors would favor the securities in the benchmark Instead it means that the manager can categorize the securities that compose the benchmark (e.g., value, growth, high yield.) and has an opinion regarding their attractiveness as an investment This opinion can be positive, negative, or neutral (Study Session 17, LOS 41.f) This question tested from Session 17, Reading 32, LOS c Part 5) Your answer: B was incorrect The correct answer was C) –0.30% The portion of Cutter’s return due to active management is the portfolio return minus the return on the benchmark: 4.90% – 5.20%= –0.30% (Study Session 17, LOS 41.e) This question tested from Session 17, Reading 32, LOS c Part 6) Your answer: B was incorrect The correct answer was A) 1.10% The portion of Cutter’s return due to style is the benchmark return minus the market index return: 5.20% – 4.10% = 1.10% (Study Session 17, LOS 41.e) This question tested from Session 17, Reading 32, LOS c Question 59 - #91511 Part 1) Your answer: B was incorrect The correct answer was A) Fund D The formula for the Sharpe ratio is: For funds A, B, C, and D, the respective Sharpe ratios are 1.075, 1.076, 1.134, and 1.171 Fund D is the highest calculated as: (7.6 – 3.5)/3.5 = 4.1/3.5 = 1.171 (Study Session 17, LOS 41.j, p) This question tested from Session 17, Reading 32, LOS p Part 2) Your answer: B was incorrect The correct answer was A) 7.66% The formula for the M2 measure is: M2Portfolio D = 7.659% = 3.5% + (7.6% − 3.5%) × (3.55%/3.5%) (Study Session 17, LOS 41.p) This question tested from Session 17, Reading 32, LOS p Part 3) Your answer: B was incorrect The correct answer was A) all of the funds Since all of the funds’ returns are higher than the benchmark for the period, all of the funds would have a positive end point for the cumulative value-added line (Study Session 17, LOS 41.r) This question tested from Session 17, Reading 32, LOS p Part 4) Your answer: B was correct! Their objections are both justified A benchmark should be specified in advance and deemed appropriate for the style of the fund (Study Session 17, LOS 41.j) This question tested from Session 17, Reading 32, LOS p Part 5) Your answer: B was incorrect The correct answer was A) Carter is correct and Walters is wrong Carter is correct in that a custom benchmark should include an appropriate weight for cash holdings Walters is wrong in that a benchmark should be modified on a preset schedule (Study Session 17, LOS 41.l) This question tested from Session 17, Reading 32, LOS p Part 6) Your answer: B was incorrect The correct answer was C) fires a skilled manager In this case, we assume a manager does not add value and try to gather information that the manager does Without sufficient evidence to prove value is added, the manager would be fired Random noise could lead to this conclusion even though the manager does add value (Study Session 17, LOS 41.t) This question tested from Session 17, Reading 32, LOS p Question 60 - #92700 Your answer: B was incorrect The correct answer was A) The amount of leverage used in the fund Both returns based style analysis and fundamental factor model micro attribution would utilize the returns to various indices as well as the sensitivities to the indices However, returns based style analysis would not examine fundamental factors such as the leverage in the fund and the size of the stocks in the fund This question tested from Session 17, Reading 32, LOS m Question 61 - #91449 Part 1) Your answer: A was incorrect The correct answer was C) 0.45 Sharpe Ratio = Sj = (Rj – RF) / σj = (12 − 4.50) / 16.80 = 0.45 This question tested from Session 17, Reading 32, LOS p Part 2) Your answer: B was correct! Treynor measure = Tj = (Rj – RF) / βj = (0.12 − 0450) / 1.35 = 0.0556 This question tested from Session 17, Reading 32, LOS p Question 62 - #91487 Your answer: B was correct! The Treynor measure calculates excess return relative to systematic risk and should be used to evaluate portfolios that will be an addition to an overall larger portfolio Sharpe ratio, which uses standard deviation as the risk measure, should be used to evaluate portfolios that will comprise the majority of the investor’s overall asset base This question tested from Session 17, Reading 32, LOS p Question 63 - #92912 Your answer: B was correct! The manager earned a return from active management, where the active return is the manager’s return minus the benchmark return (7.60% − 6.20% = 1.40%) The manager did not earn a return from style, where the style return is the benchmark return minus the market return (6.20% − 8.80% = -2.60%) This question tested from Session 17, Reading 32, LOS e Question 64 - #92937 Your answer: B was incorrect The correct answer was C) Attribution analysis separates a portfolio manager's performance into an allocation effect and a selection effect Attribution analysis can be done with bonds as it is with equities The only difference is the categories of attribution Benchmark error is very much a part of the Treynor measure, as it uses beta as its risk measure This question tested from Session 17, Reading 32, LOS l Question 65 - #92780 Your answer: B was incorrect The correct answer was A) The strength of fundamental factor analysis is its simplicity and the reliability of the correlations it produces A key weakness of fundamental factor model attribution is that it can prove to be complex leading to the potential for spurious correlations This question tested from Session 17, Reading 32, LOS m Question 66 - #93088 Your answer: B was correct! The Treynor measure is defined as a fund’s excess return (fund’s return minus the risk-free rate) divided by its systematic risk (beta) This question tested from Session 17, Reading 32, LOS p Question 67 - #91479 Your answer: B was incorrect The correct answer was A) 0.064 (0.13 – 0.0525)/1.21 = 0.064 This question tested from Session 17, Reading 32, LOS p Question 68 - #91481 Your answer: B was correct! Fund Treynor Measure Beta A 0.12 1.10 B 0.17 1.25 C 0.21 0.80 Std Dev 0.14 0.21 0.10 Returns 18.2% 26.3% 21.8% The Treynor Measure = (return of the portfolio – return of risk-free asset)/Beta Solve for the return of the portfolio This question tested from Session 17, Reading 32, LOS p Question 69 - #91503 Part 1) Your answer: B was incorrect The correct answer was C) 0.40 and 0.09 The Sharpe ratio is the difference between the Growth Fund return and the risk-free rate divided by the Growth Fund standard deviation [(0.14 – 0.04)/0.25 = 0.40] The Treynor measure is the difference between the Growth Fund return and the risk-free rate divided by the Growth Fund Beta [(0.14 – 0.04) / 1.15 = 0.09] This question tested from Session 17, Reading 32, LOS p Part 2) Your answer: B was incorrect The correct answer was C) The Treynor measure If the AM Growth Fund is well diversified, the appropriate risk measure would be beta, or the systematic risk component of total risk Therefore, the Treynor measure would be appropriate in this case This question tested from Session 17, Reading 32, LOS p Question 70 - #92759 Your answer: B was incorrect The correct answer was A) Exposures to the factors need to be determined at the start of an evaluation period Exposure to the factors need to be determined at the start of an evaluation period is a weakness of fundamental factor model attribution This question tested from Session 17, Reading 32, LOS m Question 71 - #91463 Your answer: B was incorrect The correct answer was A) is similar to the internal rate of return The time-weighted return is not similar to the internal rate of return The money-weighted return is similar to the internal rate of return and is also known as the linked internal rate of return The other responses accurately characterize the time-weighted return This question tested from Session 17, Reading 32, LOS c Question 72 - #91540 Your answer: B was incorrect The correct answer was A) The return due to the external interest rate environment is estimated from a term structure analysis of AAA rate corporate securities The return due to the external interest rate environment is estimated from a term structure analysis of Treasury securities We are trying to establish the return on a default free bond portfolio, therefore the use of corporate securities would be inappropriate This question tested from Session 17, Reading 32, LOS n Question 73 - #93029 Your answer: B was incorrect The correct answer was C) The Treynor measure includes companyspecific risk as part of its performance measurement The Treynor measure does not include company-specific risk, it uses beta in the denominator, which only measures systematic risk Note that the Sharpe measure uses standard deviation in its denominator, which is a measure of total risk This question tested from Session 17, Reading 32, LOS p Question 74 - #91516 Your answer: B was correct! Macro performance evaluation is performed at the fund sponsor level It decomposes fund performance into that from net contributions, the risk-free asset, asset categories, benchmarks, investment managers, and allocation effects This question tested from Session 17, Reading 32, LOS k Question 75 - #91436 Your answer: B was incorrect The correct answer was C) An equity fund had a return over the past year of 17% and a standard deviation of returns of 12% During this period the risk-free return was 3% The Sharpe ratio for the fund was 1.17 The Sharpe ratio = (0.17 – 0.03)0.12 = 1.17 Note that focusing on maturity ranges or a particular market segment are definitions of style for a bond portfolio manager Also, managers whose styles are specified for them should only get credit for the excess return that is due to security selection This question tested from Session 17, Reading 32, LOS p Question 76 - #91621 Your answer: B was incorrect The correct answer was C) Allocation/selection attribution can lead to spurious correlations It is actually fundamental factor model attribution that can lead to spurious correlations because the analysis is quite complex This question tested from Session 17, Reading 32, LOS m Question 77 - #91468 Your answer: B was incorrect The correct answer was A) Return will be lower because the contribution is added to the assets in the denominator and reduces the size of the numerator If you consider the calculation of return when a contribution is received at the beginning of the period, it is added to the opening market value This increases the denominator, which is now opening market value plus the contribution In the numerator, the addition of the contribution to the opening market value reduces the difference between this value and the closing value at the end of the month There is a larger denominator and a smaller numerator Therefore, return must be reduced This question tested from Session 17, Reading 32, LOS b Question 78 - #93020 Your answer: B was incorrect The correct answer was A) excess return earned compared to its total risk The Sharpe ratio is defined as a fund’s excess return (fund’s return minus the risk-free rate) divided by the total risk (standard deviation) This question tested from Session 17, Reading 32, LOS p Question 79 - #92742 Your answer: B was correct! It is necessary to determine the fundamental factors that determine the systematic (no unsystematic) returns Both of the other statements are correct This question tested from Session 17, Reading 32, LOS m Question 80 - #92956 Your answer: B was incorrect The correct answer was A) 1.25% Expected treasury yield = 7.50% Unexpected treasury yield = 0.50% Return from sector allocation = 0.50% Return from allocation/selection interaction = 0.25% Return attributable to within-sector selection = 1.25% (can be backed out given the other information) Total return = 10.0% This question tested from Session 17, Reading 32, LOS l Question 81 - #91450 Part 1) Your answer: B was incorrect The correct answer was C) 0.41; 0.46 Sharpe ratio = Sj = (Rj – RF) / σj For the Prime Growth Fund, the Sharpe ratio = (12 − 3) / 22 = 0.41 For the S&P 500, the Sharpe ratio = (9.50 − 3.00) / 14 = 0.46 This question tested from Session 17, Reading 32, LOS p Part 2) Your answer: A was correct! Treynor measure = Tj = (Rj – RF) / βj For Prime Growth Fund, the Treynor measure = (0.12 − 0.03) / 1.12 = 0.0804 For the S&P 500, the Treynor measure = (0.0950 − 0.03) / = 0.0650 This question tested from Session 17, Reading 32, LOS p Question 82 - #91499 Your answer: B was incorrect The correct answer was A) return on the average investment during the period The money-weighted return measures the return on the average investment during a specific time period The money-weighted return computation uses the concept of an internal rate of return This question tested from Session 17, Reading 32, LOS c Question 83 - #93098 Part 1) Your answer: B was incorrect The correct answer was A) 0.0% Decision Making Incremental % Return Fund Value Level Contribution Beginning value $210,000,000 Net contributions $211,050,000 0.0% Risk-free asset ($211,050,000 × 0.4%) $211,894,200 0.4% Asset Category $220,369,968 4.0% Benchmarks $221,031,078 0.3% Investment Managers $221,141,594 0.05% Allocation Effects $221,318,507 0.08% Total Fund $221,318,507 4.83% (Study Session 17, LOS 41.l) This question tested from Session 17, Reading 32, LOS l Part 2) Your answer: B was incorrect The correct answer was A) 0.40% Decision Making Incremental % Return Fund Value Level Contribution Beginning value $210,000,000 Net contributions $211,050,000 0.0% Risk-free asset ($211,050,000 × 0.4%) $211,894,200 0.4% Asset Category $220,369,968 4.0% Benchmarks $221,031,078 0.3% Investment Managers $221,141,594 0.05% Allocation Effects $221,318,507 0.08% Total Fund $221,318,507 4.83% (Study Session 17, LOS 41.l) This question tested from Session 17, Reading 32, LOS l Incremental Value Contribution $1,050,000 $844,200 $8,475,768 $661,110 $110,516 $176,913 $11,318,507 Incremental Value Contribution $1,050,000 $844,200 $8,475,768 $661,110 $110,516 $176,913 $11,318,507 Part 3) Your answer: B was incorrect The correct answer was A) 4.00% Decision Making Incremental % Return Fund Value Level Contribution Beginning value $210,000,000 Net contributions $211,050,000 0.0% Risk-free asset ($211,050,000 × 0.4%) $211,894,200 0.4% Asset Category $220,369,968 4.0% Benchmarks $221,031,078 0.3% Investment Managers $221,141,594 0.05% Allocation Effects $221,318,507 0.08% Total Fund $221,318,507 4.83% (Study Session 17, LOS 41.l) This question tested from Session 17, Reading 32, LOS l Part 4) Your answer: B was incorrect The correct answer was A) 0.30% Decision Making Incremental % Return Fund Value Level Contribution Beginning value $210,000,000 Net contributions $211,050,000 0.0% Risk-free asset ($211,050,000 × 0.4%) $211,894,200 0.4% Asset Category $220,369,968 4.0% Benchmarks $221,031,078 0.3% Investment Managers $221,141,594 0.05% Allocation Effects $221,318,507 0.08% Total Fund $221,318,507 4.83% (Study Session 17, LOS 41.l) This question tested from Session 17, Reading 32, LOS l Part 5) Your answer: B was correct! Decision Making Incremental % Return Fund Value Level Contribution Beginning value $210,000,000 Net contributions $211,050,000 0.0% Risk-free asset ($211,050,000 × 0.4%) $211,894,200 0.4% Asset Category $220,369,968 4.0% Benchmarks $221,031,078 0.3% Investment Managers $221,141,594 0.05% Allocation Effects $221,318,507 0.08% Total Fund $221,318,507 4.83% (Study Session 17, LOS 41.l) This question tested from Session 17, Reading 32, LOS l Incremental Value Contribution $1,050,000 $844,200 $8,475,768 $661,110 $110,516 $176,913 $11,318,507 Incremental Value Contribution $1,050,000 $844,200 $8,475,768 $661,110 $110,516 $176,913 $11,318,507 Incremental Value Contribution $1,050,000 $844,200 $8,475,768 $661,110 $110,516 $176,913 $11,318,507 Part 6) Your answer: B was incorrect The correct answer was C) 0.080% Decision Making Incremental % Return Fund Value Level Contribution Beginning value $210,000,000 Net contributions $211,050,000 0.0% Risk-free asset ($211,050,000 × 0.4%) $211,894,200 0.4% Asset Category $220,369,968 4.0% Benchmarks $221,031,078 0.3% Investment Managers $221,141,594 0.05% Allocation Effects $221,318,507 0.08% Total Fund $221,318,507 4.83% (Study Session 17, LOS 41.l) This question tested from Session 17, Reading 32, LOS l Incremental Value Contribution $1,050,000 $844,200 $8,475,768 $661,110 $110,516 $176,913 $11,318,507 Question 84 - #92940 Your answer: B was incorrect The correct answer was C) Market indices would be used for manager styles Broad market indices would be used for asset categories Narrow indices would be used for manager’s investment styles This question tested from Session 17, Reading 32, LOS k Question 85 - #93187 Your answer: B was correct! The information ratio is calculated as the surplus return divided by the standard deviation of surplus returns The cost in the information ratio is the standard deviation of surplus returns This question tested from Session 17, Reading 32, LOS q Question 86 - #92904 Part 1) Your answer: B was correct! Attributable to the pure sector allocation effect: (0.65 – 0.50)(13.8 – 10.63) + (0.25 – 0.40)(8.3 – 10.63) + (0.10 – 0.10)(4.05 – 10.63) = 0.83% The benchmark return is calculated as the weighted average of individual asset returns in the benchmark: (.5 x 13.8) + (.4 x 8.3) + (.1 x 4.05) = 10.63% This question tested from Session 17, Reading 32, LOS l Part 2) Your answer: B was correct! Attributable to the within-sector selection effect: (0.5)(17.0 – 13.8) + (0.4)(8.1 – 8.3) + (0.10)(3.85 – 4.05) = 1.5% This question tested from Session 17, Reading 32, LOS l Question 87 - #92788 Your answer: B was incorrect The correct answer was A) Fund sponsors will terminate underperforming managers, underperforming accounts will not survive, and the median will be biased upwards The evidence is clear Fund sponsors will rationally terminate underperforming managers, underperforming accounts will not survive, and the median will be biased upwards Fund sponsors demonstrate little appetite for underperforming accounts and they are quickly removed This question tested from Session 17, Reading 32, LOS h Question 88 - #92779 Your answer: B was incorrect The correct answer was A) dealer quotes for similar securities Matrix pricing is used when the asset is illiquid and a security price is not readily available In matrix pricing, the analyst uses dealer quoted prices for similar securities This question tested from Session 17, Reading 32, LOS d Question 89 - #91485 Your answer: B was correct! The security weights in a benchmark should be clearly identified but there is no stipulation that a valid benchmark have security weights based on market values This question tested from Session 17, Reading 32, LOS f Question 90 - #91451 Part 1) Your answer: B was incorrect The correct answer was C) 0.40 and 0.09 Sharpe ratio = (R - Rf) / σ where: R = return Rf = risk-free return σ = standard deviation The Sharpe ratio is the difference between the Growth Fund return and the risk-free rate divided by the Growth Fund standard deviation [(0.14 – 0.04)/0.25 = 0.40] Treynor measure = (R - Rf) / β where: R = return Rf = risk-free return β = beta The Treynor measure is the difference between the Growth Fund return and the risk-free rate divided by the Growth Fund Beta [(0.14 – 0.04) / 1.15 = 0.09] This question tested from Session 17, Reading 32, LOS p Part 2) Your answer: B was incorrect The correct answer was A) The Sharpe ratio If the AM Growth Fund is undiversified, the Sharpe ratio would be more appropriate The Sharpe ratio measures excess return per unit of total risk, while Treynor measures excess return per unit of systematic risk For a well-diversified portfolio, the rankings between the Sharpe and Treynor measures will be insignificant as total risk and systematic risk will be approximately the same However, if a portfolio is not well diversified, the Treynor measure may overstate the portfolio's ranking because only systematic risk is considered Sharpe will consider unsystematic risk, which will give the undiversified portfolio a more appropriate ranking This question tested from Session 17, Reading 32, LOS p Question 91 - #92968 Your answer: B was incorrect The correct answer was C) It is cheap to construct and easy to maintain A major disadvantage of custom security-based benchmarks is that they can be expensive to construct and maintain The other statements are regarded to be advantages of using custom securitybased benchmarks This question tested from Session 17, Reading 32, LOS f Question 92 - #92960 Your answer: B was incorrect The correct answer was C) Identify the manager’s investment process including asset selection and weighting; use the same assets and weighting for the benchmark; assess and rebalance the benchmark on a predetermined schedule The three steps required to construct a custom security-based benchmark are as follows: Identify the manager’s investment process including asset selection and weighting Use the same assets and weighting for the benchmark Assess and rebalance the benchmark on a predetermined schedule This question tested from Session 17, Reading 32, LOS g Question 93 - #92672 Your answer: A was correct! Ideally, the manager would be looking for a beta close to one This would indicate that the portfolio and benchmark are sensitive to the same systematic factors, which would be a desirable characteristic If the beta differs significantly from one, the benchmark may be responding to a different set of factors, which is not a desirable characteristic of a benchmark This question tested from Session 17, Reading 32, LOS i Question 94 - #91441 Your answer: B was incorrect The correct answer was C) earned 10 bps less than the market on a risk-adjusted basis Recall that Jensen’s alpha measures excess return for a given level of risk It is a “risk-adjusted” measure of return This question tested from Session 17, Reading 32, LOS p Question 95 - #91478 Your answer: B was incorrect The correct answer was A) Sharpe measure Both the Treynor measure and the Jensen's alpha assume that the CAPM is the underlying riskadjustment model The Sharpe measure on the other hand does not make this assumption It uses total risk of a portfolio, unlike the Treynor measure and Jensen's alpha, which use the systematic (undiversifiable) risk as measured by beta to compute the risk-adjusted return of a portfolio This question tested from Session 17, Reading 32, LOS p Question 96 - #92871 Part 1) Your answer: B was correct! Sharpe ratio = (Return – risk free rate) / std deviation = (0.22 − 0.05) / 0.30 = 0.5667 This question tested from Session 17, Reading 32, LOS l Part 2) Your answer: B was correct! The benchmark return is (.6 x 12.9) + (.3 x 6.9) + (.1 x 4.1) = 10.22 Attributable to the sector effect: (0.50 – 0.60)(12.9 – 10.22) + (0.45 – 0.30)(6.9 – 10.22) + (0.05 – 0.10)(4.1 – 10.22) = -0.46% This question tested from Session 17, Reading 32, LOS l Part 3) Your answer: B was incorrect The correct answer was A) 1.06% Attributable to the within-sector effect: (0.60)(14.5 – 12.9) + (0.30)(7.2 – 6.9) + (0.10)(4.2 – 4.1) = 1.06% This question tested from Session 17, Reading 32, LOS l Question 97 - #92943 Your answer: B was incorrect The correct answer was C) Calculate the historical mean and standard deviation for the benchmark Although calculating the historical mean and standard deviation for the benchmark is something that many portfolio managers will do, it is not specified as one of the steps in the construction of a custom security-based benchmark This question tested from Session 17, Reading 32, LOS g Question 98 - #92860 Part 1) Your answer: B was correct! RFS = (WP,FS − WB,FS)(RB,FS − RB) RFS = (0.3543% − 0.3043%)(2.56% − 1.22%) RFS = (0.05)(1.34%) = 0.067% This question tested from Session 17, Reading 32, LOS l Part 2) Your answer: B was incorrect The correct answer was A) 0.53% RE = WB,E(RP,E − RB,E) RE = 0.2579 × (0.5% − (-1.56%)) RE = 0.53% This question tested from Session 17, Reading 32, LOS l Part 3) Your answer: B was incorrect The correct answer was C) +0.04% RT = (WP,T − WB,T) × (RP,T − RB,T) RT = (0.1379 − 0.1605) × (2.78% − 4.56%) RT = 0.04% This question tested from Session 17, Reading 32, LOS l Question 99 - #91492 Your answer: B was incorrect The correct answer was C) Interpretation of performance attribution Performance appraisal involves the interpretation of performance attribution A judgment is made about manager’s decisions and skill, in an effort to differentiate between returns attributable to luck and those attributable to skill This question tested from Session 17, Reading 32, LOS b Question 100 - #93096 Your answer: A was incorrect The correct answer was B) fund’s return in excess of the required rate of return given the systematic risk of the portfolio Jensen’s alpha measures the return above the required rate of return based on the fund’s systematic risk Said differently, Jensen’s alpha is the amount of return earned by the fund over and above the return predicted for the fund based on the capital asset pricing model, given the fund’s systematic risk This question tested from Session 17, Reading 32, LOS p Question 101 - #92684 Your answer: B was incorrect The correct answer was A) An active position is the difference between the weight of a security in the managed portfolio versus the benchmark Tracking error is defined by standard deviation not variance Exposure to systematic risk does not need to be the same at all times rather it should average that of the benchmark The correct statement is the one in relation to active positions This question tested from Session 17, Reading 32, LOS i Question 102 - #92815 Part 1) Your answer: B was correct! Rb = (0.4 × 15) + (0.35 × 12) + (0.25 × 18) = 14.70% Sector Effect = ∑{(Wpi – Wbi) × (Rbi – Rb)} Or Sector effect = [((0.50−0.40) × (15−14.7)) + ((0.30−0.35) × (12−14.7)) + ((0.20−0.25) × (18−14.7))] = [0.03 + 0.135 − 0.165] = 0.0% This question tested from Session 17, Reading 32, LOS l Part 2) Your answer: B was correct! Within-sector selection Effect = ∑[(WBj × (RPj − RBj)] Within-sector selection effect = [(0.40 × (14 − 15)) + (0.35 × (19 − 12)) + (0.25 × (8 − 18))] = 0.45% This question tested from Session 17, Reading 32, LOS l Question 103 - #93016 Your answer: B was incorrect The correct answer was C) 32.70% total value-added = overall actual fund return – overall benchmark returns = 10.2 − (-22.5) = 32.70% Blakely’s Miranda Fund was able to outperform the S&P 500 index by 32.7% This question tested from Session 17, Reading 32, LOS l Question 104 - #91542 Part 1) Your answer: B was incorrect The correct answer was C) 20 bps bps The interest rate management effect is a combination of the impacts of 1) duration management 2) convexity management and 3) Yield curve change management This question tested from Session 17, Reading 32, LOS o Part 2) Your answer: B was correct! Ashley Asset Management exceeded the benchmark by 33bps Interest rate management has added 20bps (22bps − 10bps + 8bps) and bond selection 18bps This is a total of 38bps, which is more than 100% of their outperformance Thierry Asset Management exceeded the benchmark by 119bps Immunization against interest rate exposure added 2bps and bond selection reduced performance by 16bps an overall impact of -14bps Clearly Thierry Asset Management did not add contribution through their stated objective, most of it came from sector selection! This question tested from Session 17, Reading 32, LOS o Part 3) Your answer: B was correct! The expected return is the return implied by forward rates, not the on-the-run Treasury spot rate curve Although the forward rates are derived from the spot rates, a two-year spot rate is not the same as the expected forward rate in two years time This question tested from Session 17, Reading 32, LOS o Question 105 - #92849 Your answer: B was correct! The use of trade date accounting would be regarded as a positive attribute of the account in the context of measuring returns Trade date accounting is preferred to settlement date and the inclusion of accrued interest and dividends would be ideal Matrix pricing is the use of estimated prices taken from quoted prices on securities with similar characteristics; this could clearly introduce inaccuracies in the measurement of returns This question tested from Session 17, Reading 32, LOS d  ... There are seven properties of a valid benchmark With regard to the median account approach, its value is measurable This is probably the only criteria that the median manager approach satisfies... #91 437 Your answer: B was incorrect The correct answer was A) Manager C Portfolio Manager Return Beta Standard Deviation Sharpe 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... This question tested from Session 17, Reading 32 , LOS a Question 23 - #92696 Your answer: B was incorrect The correct answer was C) macro evaluation is an incremental approach and micro evaluation