CFA LEVEL-II, PRACTICE QUESTIONS Reading # 32: Evaluating Portfolio Performance | Questions Question - #91546 One of the properties of a valid benchmark is that it be reflective of current investment opinion Which of the following is the most accurate explanation of this property? A) The manager should have knowledge of the securities in the benchmark B) The manager should accept the applicability of the benchmark C) The securities in the benchmark should be those favored by a majority of analysts Question - #91455 The following data has been collected to appraise the performance of four asset management firms: Dixon Fund Adams Fund Bould Fund Winterburn Fund Market Index 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 The risk free rate of return is 4% Part 1) Using the Treynor measure, rank the four funds in terms of the risk adjusted excess returns starting with the highest performing fund and ending with the lowest performing fund: A) Adams, Bould, Winterburn, Dixon B) Bould, Adams, Dixon, Winterburn C) Adams, Bould, Dixon, Winterburn Part 2) Using the M2 Measure, rank the four funds in terms of the risk adjusted excess returns starting with the highest performing fund and ending with the lowest performing fund: A) Adams, Dixon, Winterburn, Bould B) Bould, Adams, Dixon, Winterburn C) Adams, Bould, Dixon, Winterburn Part 3) Using the Sharpe Measure, rank the four funds in terms of the risk-adjusted excess returns starting with the highest performing fund and ending with the lowest performing fund: A) Adams, Bould, Winterburn, Dixon B) Adams, Bould, Dixon, Winterburn C) Bould, Adams, Dixon, Winterburn Question - #93049 An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index over the same time period Using Jensen’s Alpha to measure the risk/return performance of the Equity fund and the S&P 500, which of the following conclusions is CORRECT? Equity Fund S&P 500 Return 23% 27% Standard Deviation 15% 19% Beta 1.09 1.00 Risk-free rate is 3.50% A) The S&P 500 underperformed the equity fund by 2.67% B) The S&P 500 outperformed the equity fund by 3.24% C) The equity fund underperformed the S&P 500 by 6.12% Question - #92713 The results of a macro performance attribution analysis of a fund is listed below Fund Value $100,000 100,000 101,000 108,000 109,000 110,000 Beginning value Net contributions Risk-free asset Asset category Benchmarks Investment strategies Allocation effects 112,000 Had the manager only engaged in a pure index approach, instead of 12%, the return of the fund would have been: A) 9% B) 8% C) 10% Question - #91469 When constructing a quality control chart which of the following is an important assumption that is made about the distribution of the manager’s value added returns? A) Value-added returns are independent from period to period and normally distributed The investment process is consistent thus ensuring that a high degree of the error term in B) one period can be explained by the error term in the previous period The null hypothesis states that the expected value-added return is the risk free rate of C) return Question - #92769 Fund Sponsors often use the median account in a particular universe of account returns as an appropriate benchmark This form of benchmark has a number of drawbacks Which of the following is NOT a drawback that would be associated with using the median account as a benchmark? A) It is virtually impossible to identify the median manager in advance B) It is not measurable as its value cannot be determined on a reasonably frequent basis C) As the median manager is unknown, the measure is ambiguous Question - #91483 The Sharpe ratio, Treynor measure, the M2 measure and Jensen’s Alpha techniques all measure the risk/return performance of portfolios Which of the following statements about these measurement techniques is least accurate? Using the capital market line the M2 compares the account's return to the market return A) and is a comparative measure While the Treynor measure computes excess return per unit of risk, Jensen's Alpha B) measures differential return for a given level of risk The Sharpe ratio measures the slope of the capital allocation line (CAL), with the lowest C) slope having the most desirable risk/return combination Question - #93048 With respect to the level of return and how the return was earned, performance evaluation should: A) not give an indication of either the level of return or how the return was earned B) give an indication of both the level of return and how the return was earned C) give an indication of the level of return but not how the return was earned Question - #91494 The time-weighted return measures the: A) return per unit of domestic currency B) return on the average investment during the period C) total return during the period Question 10 - #93172 Which of the following best describes the use of quality control charts in portfolio management? Quality control charts are used to determine if a manager has: A) strayed from their stated style B) substantial excess returns C) statistically significant excess returns Question 11 - #92996 In the management of a fund, performance evaluation is part of: A) the feedback step of the investment management process B) the strategic decision-making step of the investment management process C) the compensation computation of the investment management process Question 12 - #91462 Which of the following is NOT a conclusion that could be derived from plotting a manager's valueadded returns relative to the benchmark on a quality control chart? The chart can be used to determine whether or not the potential superior performance is A) statistically significant If value added returns are distributed randomly around the horizontal axis then manager’s B) added value returns are more or less random If returns are consistently above the horizontal axis this would indicate superior C) performance on the part of the manager under review Question 13 - #92373 With regard to the use of value added return in the measurement of hedge fund performance, which of the following statements is most accurate? Although weights sum to zero a return is calculated by summing the performance impacts A) of the individual long positions Value added return is calculated as the difference between the portfolio return, given B) benchmark weightings, and the actual portfolio return Value added return is simply the difference between the portfolio return and the C) benchmark return Question 14 - #91547 Which of the following would be regarded as the least appropriate method to measure the performance of a hedge fund? A) The Sharpe ratio B) Separate long/short benchmarks C) Relative performance comparisons with traditional benchmarks Question 15 - #91457 One limitation of the money-weighted return is the fact that it: A) penalizes managers for cash flows that occur outside of their control B) computes the return independent of the cash flows C) requires computations every time a cash flow occurs Question 16 - #91513 The following are a number of contributions to return for a fixed-income portfolio: Return on interest rate management Return on trading activity Return due to changes in forward rates Return on the default-free benchmark Which of the above statements is (are) CORRECT? Effect of External Contribution of the Interest Management Environment Process A) and and B) and and C) 1, and Question 17 - #92876 Accounts that contain illiquid assets present additional problems of accurately measuring return Which of the following statements would NOT be regarded as a problem associated directly with illiquid assets? A) Matrix pricing is used B) Assets are carried at the price of the last trade C) Account valuations use trade date accounting as opposed to settlement accounting Question 18 - #93149 You manage the UBZ Balanced Fund, and the following data apply Asset Class Fund Weight Benchmark Weight Fund Return (%) Benchmark Return (%) 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 The value added attributable to the pure sector allocation effect is: A) 0.600% B) 0.485% C) 0.291% Question 19 - #91622 Which of the following is NOT regarded to be an essential characteristic of a valid benchmark? A) Appropriate to the manager’s investment approach and style B) Reflective of past investment opinion C) Specified in advance Question 20 - #91608 The following data pertains to the UBZ Balanced Fund: Asset Class Fund Weight Benchmark Weight Fund Return (%) Benchmark Return (%) 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 What is the within-sector selection effect? A) 0.397% B) 0.291% C) 1.085% Question 21 - #91506 Which of the following is NOT a conclusion regarding quality control charts and how they are typically used to evaluate manager performance? A) H0 will be that the manager adds no value; Ha is that the manager adds positive value B) This is a two-tailed test C) Keeping a manager who generates no value added would be a Type I error Question 22 - #93135 June Spraker, CFA, manages a portfolio for a private family In the recent update of the investment policy statement (IPS), the family has asked Spraker to increase the sophistication of her portfolio performance evaluation to give an exhaustive assessment of the risks to which the portfolio is exposed The family insists on including the details of the evaluation process in the IPS Their request is: A) not justified because portfolio performance evaluation should not be addressed in the IPS justified because there are a wide variety of ways investment returns can be earned with B) many types of risk exposures, and the details of the process should be in the IPS justified because this is what the law requires, but the usefulness of the request is not C) clear Question 23 - #92696 In comparing macro and micro performance attribution methodologies to evaluate the drivers of investment performance, it is most correct to say that: micro evaluation is an incremental approach and macro evaluation focuses on deviations A) from benchmarks B) both macro and micro evaluation focus on the deviations from benchmarks macro evaluation is an incremental approach and micro evaluation focuses on deviations C) from benchmarks Question 24 - #93125 An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index over the same time period Equity Fund S&P 500 Return -12% -16% Standard Deviation 15% 19% Beta 1.18 1.00 Risk-free rate is 6.00% The difference between the Treynor measure for the equity fund and the Treynor measure for the S&P 500 is: A) 0.15 B) 0.17 C) 0.07 Question 25 - #100903 Which of the following statements regarding the Sharpe ratio is most accurate? The denominator of the Sharpe ratio is standard deviation which is comprised partly of A) systematic risk called beta B) Beta is not a component of the Sharpe ratio The measure of risk used in the denominator of the Sharpe ratio is standard deviation also C) known as unsystematic risk Question 26 - #91453 One limitation of the time-weighted return is the fact that it: A) requires the computation of the internal rate of return every time a cash flow occurs B) requires computations every time a cash flow occurs C) penalizes managers for cash flows that occur outside of their control Question 27 - #92739 Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core large cap equity fund The market proxy and benchmark for performance measurement purposes is the S&P 500 Although the Miranda portfolio generally mirrors the asset class and sector weightings of the S&P, Blakely is allowed a significant amount of leeway in managing the fund Her portfolio holds only stocks found in the S&P 500 and cash Blakely was able to produce exceptional returns last year (as outlined in Table A below) through her market timing and security selection skills At the outset of the year, she became extremely concerned that the combination of a weak economy and geopolitical uncertainties would negatively impact the market Taking a bold step, she changed her market allocation For the entire year her asset class exposures averaged 50% in stocks and 50% in cash The S&P’s allocation between stocks and cash during period was a constant 97% and 3%, respectively The risk-free rate of cash returns was 2% Table – One-Year Trailing Returns: Miranda Fund vs S&P 500 Miranda Fund S&P 500 Return 10.2% -22.5% Standard 37% 44% Deviation Beta 1.10 1.00 Part 1) What are the Sharpe ratios for the Miranda Fund and the S&P 500? Miranda Fund S&P 500 A) 0.2216 -0.5568 B) 0.3515 -0.2227 C) 0.0745 -0.2450 Part 2) What is the Treynor measure for the Miranda Fund and the S&P 500? Miranda Fund S&P 500 A) 0.0745 -0.2450 B) 0.1109 -0.2050 C) 0.2216 -0.5568 Part 3) What is the Jensen measure for the Miranda Fund? A) 0.0745 B) 0.3270 C) 0.3515 Part 4) What are the one-year asset class returns (stocks, cash) for Miranda and the benchmark? Miranda Fund (stocks, S&P 500 (stocks, cash) cash) A) 18.4%, 2% -23.26%, 2% B) 22.4%, 2% -23.13%, 2% C) 18.4%, 2% -23.10%, 3% Part 5) What was the effect of Blakely's active management decision on the Miranda Fund's one-year performance? A) 20.83% B) 32.70% C) 11.87% Part 6) What was the effect of Blakely's within-sector selection ability on the Miranda Fund's one-year performance? A) 22.83% B) 11.87% C) 40.41% Question 28 - #93017 All of the following would be regarded as a specific disadvantage of factor-based-models, EXCEPT: it is possible to construct multiple benchmarks, all having the same factor exposures but A) with different returns B) the benchmark may not be investable C) the manager’s style may deviate from the style reflected in the benchmark Question 29 - #93006 Given the following data, how is the manager’s performance most accurately characterized? Manager's Return 5.2% Benchmark Return 6.3% Market Index 4.3% Return The manager earned an excess return from A) active management but not from style The manager earned an excess return from B) style but not from active management The manager earned an excess return from C) style and active management Question 30 - #100904 A portfolio manager has a well diversified portfolio and they are trying to determine whether or not to add a particular stock to the portfolio to increase the portfolio’s overall risk adjusted return To decide whether or not to add the stock the manager will back test the portfolio based on historical data of the stock and the portfolio The relevant measure to use in comparing the results of the back tested model comparing the results of the portfolio before and after the addition of the stock would be the: A) Treynor measure B) Sharpe ratio C) Information ratio Question 31 - #93154 An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index over the same time period Equity Fund S&P 500 Return 27% 29% Standard Deviation 33% 20% Beta 0.95 1.00 Risk-free rate is 4.00% The Treynor measure and the Sharpe ratio, in that order, for the S&P 500 are: A) 0.25 and 1.25 B) 0.33 and 0.97 C) 0.18 and 1.11 Question 32 - #93124 Which of the following is NOT required for macro performance attribution? A) Benchmark portfolio returns B) Fund returns, valuations, and external cash flows C) Tactical asset allocations Question 33 - #91488 Of the Sharpe, Treynor, and Jensen’s Alpha measures, when measuring the risk/return performance of actively managed portfolios, which is the most appropriate to use? A) Sharpe ratio B) Both measures are equally appropriate C) Jensen's Alpha Question 34 - #91510 The following figures provide performance data for two managers, Cumulus Managers and Saturn Managers The benchmark return is 12% and its standard deviation is 25% The risk-free rate is 4.2% Cumulus Saturn Return 15.0% 18.0% Standard Deviation 29.0% 33.0% Beta 0.9 1.3 Which of the following would be the most appropriate conclusion regarding their relative performance, using the M2 measure and the Treynor ratio? A) Saturn is the superior manager using both the M2 measure and the Treynor ratio B) Saturn is the superior manager using the M2 measure but not the Treynor ratio C) Cumulus is the superior manager using both the M2 measure and the Treynor ratio Question 35 - #93122 Which of the following is least likely to be utilized in macro performance evaluation? A) Pure sector allocation effects B) Beginning of period fund valuations C) External cash flows into the fund Question 36 - #91505 Jack Jensen is the president of Jensen Management Jensen prides himself on the care of his employees He states that in 30 years of portfolio management, he has only had to fire two employees Tom Mercer is president of Analytical Investors His policy has been to replace poorly performing managers, where poor performance equals underperforming their benchmark for two successive quarters Which of the following best describes these managers’ continuation decisions? A) Jensen is likely committing Type I error and Mercer is likely committing Type II error B) Jensen is likely committing Type II error and Mercer is likely committing Type I error Jensen is not likely to be committing any error and Mercer is likely committing Type II C) error Question 37 - #91474 Suppose that a portfolio management firm has decided that the costs of hiring and firing managers are excessive Which of the following would be their most appropriate course of action? The firm should: A) tolerate more Type I error to reduce Type II error B) reduce both Type I and Type II errors C) tolerate more Type II error to reduce Type I error Question 38 - #91437 Lee Hill, CFA, is evaluating three portfolio managers that he is considering adding to his consulting firm’s select list The risk-free rate is 5% Portfolio Manager Return Beta Standard Deviation A 0.13 0.75 0.06 B 0.17 0.85 0.11 C 0.08 1.20 0.01 If Hill uses the Sharpe measure as his chosen performance measure, which portfolio would he add? A) Manager C B) Manager A C) Manager B Question 39 - #92715 Which of the following best characterizes manager universes as a benchmark? Manager universes: A) are a valid benchmark because they are measurable B) are not a valid benchmark because they are not measurable C) are not a valid benchmark because they are not investable Question 40 - #92798 In using micro attribution analysis to break down the performance of the manager of a fund, the analyst finds the following for a particular asset class: Portfolio Weight 9% Sector Benchmark Weight 7% Sector Portfolio Return 4% Sector Benchmark Return 3% Benchmark Return 0.2% Based upon these numbers, the within sector selection return would be: A) 0.070% B) 0.020% C) 0.056% Question 41 - #91459 Pension Advisors, Inc (PAI), has been asked by Efficient Industries (Efficient) to evaluate the pension fund's bond managers Efficient is currently using Alpha Fixed Income Management (Alpha) and Beta Bond Advisors (Beta) Efficient hired Alpha on the basis of its proprietary rate anticipation model Beta was engaged because of its fundamental analysis process for identifying undervalued securities Bond returns over the trailing one-year period have been unusually robust due to a series of aggressive rate cuts by the Federal Reserve The trustees are concerned that the managers may have strayed from their stated investment processes in an attempt to capitalize on the extraordinary economic and monetary environment Art Gunnlow, a PAI analyst, has been assigned the task of reviewing the data and preparing a report for Efficient Gunnlow has assembled the following quarterly returns for Alpha and Beta: Quarter Alpha Return Beta Return 4.63% 1.95% 0.89% 1.15% 7.38% 2.07% 1.35% 1.45% Alpha's trailing return was 1.38% in excess of its market portfolio benchmark, while Beta's return was 0.53% in excess of its corresponding index benchmark Part 1) What are Alpha's time-weighted quarterly average and annualized returns, respectively, for the oneyear period? Quarterly Annual A) 1.654% 6.783% B) 3.529% 6.783% C) 3.529 14.881% Part 2) What are Beta's time-weighted quarterly average and annualized returns, respectively, for the oneyear period? Quarterly Annual A) 3.529% 14.882% B) 1.654% 3.529% C) 1.654% 6.783% Question 42 - #91509 Bill Smith is evaluating the performance of four large-cap equity portfolios: Funds A, B, C and D As part of his analysis, Smith computed the Sharpe ratio and the Treynor measure for all four funds Based on his finding, the ranks assigned to the four funds are as follows: Fund Treynor Measure Rank Sharpe Ratio Rank A B C D The difference in rankings for Funds A and D is most likely due to: A) different benchmarks used to evaluate each fund’s performance B) a difference in risk premiums C) a lack of diversification in Fund A as compared to Fund D Part 2) Assuming a risk-free rate of 5%, what is the Sharpe ratio for the Plumb America Index Fund? A) -0.5776 B) +0.6716 C) +0.5667 Question 55 - #91466 The Campbell account is $5,000,000 at the beginning of January and $5,200,000 at the end of the month During the month a contribution of $60,000 was received What would be the rate of return on the account if the contribution was received on January 1, what would it be if the contribution was received on January 31? January January 31 A) 2.77% 4.00% B) 4.00% 2.80% C) 2.77% 2.80% Question 56 - #92992 Value added return is defined as the: A) fund return minus the risk-free rate of return B) portfolio return minus the benchmark return C) portfolio return in excess of the return predicted based on the Capital Asset Pricing Model Question 57 - #91464 Which of the following formulas would represent an appropriate calculation of the rate of return earned by a fund when the fund receives an external cash flow at the beginning of a period? A) B) C) Question 58 - #91490 Mary Johnson and Jane Meinrod are analysts with Alpha Systems Alpha provides consulting services to portfolio managers, mutual funds, and defined benefit pension plans Alpha’s main service is performance measurement and attribution Alpha has provided this service to managers worldwide for more than eleven years Johnson and Meinrod are discussing the performance of Frank Weinstein Weinstein is a portfolio manager who caters to wealthy clients in the suburbs of Atlanta Many of his clients are quite anxious over the recent downturn in the stock market and have been selling stocks as the market has declined Conversely, a small minority of clients have been buying on the dips in the market, thereby increasing their exposure to stocks as the market has declined Many of Weinstein’s clients are quite wealthy and have over ten million dollars entrusted to him Weinstein would like his clients to pursue a more long-term trading strategy to reduce transactions costs However, because of their substantial wealth, he does not feel that he can object too strongly to their demands for short-term trading Johnson states that Weinstein’s performance should be evaluated using a money-weighted return as this would be the best gauge of his performance Meinrod replies that the use of the moneyweighted return would be less expensive than using a time-weighted return Weinstein would like Johnson and Meinrod to evaluate the performance of one of his largest clients, Thomas Franklin The records for the Franklin portfolio show the following: on August 1, the portfolio was valued at $18,600,000, and on August 16, Franklin contributed $5,000,000 to the portfolio After that contribution, the portfolio was valued at $26,200,000 On August 31, the account was valued at $19,400,000 Johnson reports that this account contains quite a few fixed-income securities and that this will increase the difficulty in valuing this account Meinrod states that a “nexus” approach can be used to deal with any difficulties encountered in valuing fixed income securities Johnson and Meinrod are also evaluating the performance of Cutter Mutual Fund Cutter specializes in investing in small cap stocks from various markets in the Pacific basin Because funds with an investment objective like Cutter’s are somewhat uncommon, Cuter has had difficulty constructing a valid benchmark While discussing the properties of a valid benchmark, Johnson asserts that a benchmark should be investable, referring to the ability of the manager to replicate the securities in the benchmark Meinrod responds that a benchmark should also reflect current investment opinion, by which she means that the benchmark should be invested in securities that most managers would agree are attractive purchases Having settled on a valid benchmark for the Cutter Fund, Johnson and Meinrod gather the following performance statistics for the fund, the benchmark, and a market index: Cutter portfolio return 4.90% Benchmark return 5.20% Market index return 4.10% Part 1) Regarding the analysts’ statements concerning the use of the money-weighted return and the timeweighted return for Weinstein portfolio: A) Johnson is incorrect, and Meinrod is correct B) both analysts are incorrect C) both analysts are correct Part 2) What are the time-weighted and money-weighted returns for the Franklin account during August (assuming compounding every half-month)? A) The time-weighted return is –17.8% and money-weighted return is –15.5% B) The time-weighted return is –15.6% and money-weighted return is –19.8% C) The time-weighted return is 4.3% and money-weighted return is 4.3% Part 3) Concerning the valuation of the Franklin account, Johnson and Meinrod were: Johnson Meinrod A) Correct Correct B) Incorrect Incorrect C) Correct Incorrect Part 4) The statements Johnson and Meinrod made concerning the use of a valid benchmark for the Cutter fund were: Johnson Meinrod A) Correct Incorrect B) Correct Correct C) Incorrect Incorrect Part 5) What is the portion of Cutter’s return due to active management? A) 1.10% B) 0.80% C) –0.30% Part 6) What is the portion of Cutter’s return due to style? A) 1.10% B) 0.80% C) –0.30% Question 59 - #91511 Bill Carter, CFA and Bob Walters, CFA are analyzing the recent return of several funds they have been assigned to manage The funds are Fund A, Fund B, Fund C, and Fund D as indicated in the table below Fund A Fund B Fund C Fund D Market Return 7.80% 7.20% 8.20% 7.60% 7.00% Beta 1.10 0.90 1.20 1.05 1.00 Return Std.Dev 4.00% 3.44% 4.15% 3.50% 3.55% Tracking Error* 0.82% 0.45% 1.02% 0.67% *Tracking error is the standard deviation of the difference between the Fund Return and the Market Index Return The risk-free rate of return for the relevant period was 3.5% The management of the firm that Carter and Walters works for is very proud of the fact that all of the four funds had a higher return than the overall market as indicated on the table The firm’s management wants to advertise how, using the market as a benchmark, these funds have had returns higher than that benchmark The firm’s management asks Carter and Walters to compute several performance measures such as the Treynor measure, the Sharpe ratio, and the M2 measure The firm’s management also asks for the construction of quality control charts In going over the results, Carter is skeptical of the results and using the market as a benchmark because that benchmark was not specified in advance Walters says that he is skeptical too because it is not clear if the market is an appropriate benchmark in all cases They want to proceed cautiously because the firm’s management recently instituted policies for manager continuation For each manager, the firm’s management has set up the null hypothesis that a manager has no skill and the alternative hypothesis is that the manager has skill in adding value Carter and Walters discuss constructing a custom benchmark for some of these or other funds they might manage A few of these funds hold cash positions to take advantage of good investment opportunities when they arise Carter says that the benchmark they construct should include cash in the weighting scheme They set aside a few weeks to construct a preliminary benchmark for several funds Walters wants to be thorough, because once they construct the benchmark, he doesn’t plan to make any modifications to the custom benchmark Part 1) The portfolio with the highest Sharpe ratio is: A) Fund D B) Fund A C) Fund C Part 2) What is the M2 measure for fund D? A) 7.66% B) 11.26% C) 6.76% Part 3) If the returns of each fund were plotted over a quality control chart using the market as a benchmark, the final point of the value-added line would be above zero, i.e., above the horizontal axis for: A) all of the funds B) all of the funds except C only C) none of the funds Part 4) With respect to the reasons for Carter and Walters being skeptical of using the market as a benchmark: A) both Carter and Walters are wrong B) both Carter and Walters are correct C) Carter is wrong and Walters is correct Part 5) With respect to the considerations that Carter and Walters put into preparing a custom benchmark, including a weighting for cash and not making modifications: A) Carter is correct and Walters is wrong B) Carter is wrong and Walters is correct C) Carter and Walters are both correct Part 6) The firm that Carter and Walters work for have set up a null hypothesis for each manager In such a case, the firm would make a type II error if it: A) keeps an unskilled manager B) hires a second manager to help a doubtful manager C) fires a skilled manager Question 60 - #92700 Which of the following would be least likely to be used in both returns based style analysis and fundamental factor model micro attribution? A) The amount of leverage used in the fund B) The sensitivities of the portfolio to index returns C) The returns to a small-cap stock index Question 61 - #91449 The following information is available for the Trumark Fund: The Trumark Fund has an average annual return of 12% over the last five years Trumark has a beta value of 1.35 Trumark has a standard deviation of returns of 16.80% During the same time period, the average annual T-bill rate was 4.5% During the same time period, the average annual return on the S&P 500 portfolio was 18% Part 1) What is the Sharpe ratio for the Trumark Fund? A) 0.80 B) 5.56 C) 0.45 Part 2) What is the Treynor measure for Trumark Fund? A) 0.45 B) 0.06 C) -0.04 Question 62 - #91487 Of the Sharpe, Treynor, and Jensen’s Alpha measures, when dealing with a sector fund which will be added to the investor’s overall larger portfolio, which is the most relevant measurement technique to assess relative risk/return performance? A) Both measures are equally appropriate B) Treynor measure C) Sharpe ratio Question 63 - #92912 Given the following data, how is the manager’s performance most accurately characterized? Manager's Return 7.6% Benchmark Return 6.2% Market Index Return 8.8% A) The manager earned an excess return from style and active management B) The manager earned an excess return from active management but not from style C) The manager earned an excess return from style but not from active management Question 64 - #92937 Which of the following statements regarding attribution analysis, benchmarks, and evaluating portfolio managers is CORRECT? A) Attribution analysis for bonds is virtually impossible B) Benchmark error is nonexistent with the Treynor measure Attribution analysis separates a portfolio manager's performance into an allocation effect C) and a selection effect Question 65 - #92780 Which of the following statements relating to allocation/selection attribution and fundamental factor model attribution is least accurate? The strength of fundamental factor analysis is its simplicity and the reliability of the A) correlations it produces The strength of allocation/selection attribution is that it disaggregates performance effects B) of manager’s decisions between sectors and securities C) The strength of allocation/selection attribution is that it is relatively easy to calculate Question 66 - #93088 The Treynor measure is correctly defined as a measure of a fund’s: A) return earned compared to its systematic risk B) excess earned compared to its systematic risk C) return earned compared to its unsystematic risk Question 67 - #91479 An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index over the same time period Equity Fund S&P 500 Return 13% 10.5% Standard Deviation 22% 20% Beta 1.21 1.00 Risk-free rate is 5.25% The Treynor measure for the equity fund is: A) 0.064 B) 0.570 C) 0.048 Question 68 - #91481 The following four funds are being considered for investment If Treasury bills (T-bills) yielded 5% during the period, which fund had the highest average annual return? Fund Treynor Beta Std Dev Measure A 0.12 1.10 0.14 B 0.17 1.25 0.21 C 0.21 0.80 0.10 A) Fund A B) Fund B C) Fund C Question 69 - #91503 Peter Michaels, CFA, works at Composite Consulting, and is in charge of evaluating the performance of various portfolio managers His main tasks are to measure and evaluate the sources of return that can be attributed to manager performance Michaels understands the importance of incorporating risk into his analyses, but realizes the limitations associated with some performance measurement techniques in accomplishing that particular objective Michaels begins the evaluation of a number of managers by examining return information from both the portfolio being evaluated and its designated benchmark Part 1) Michaels has the following return information for the AM Growth Fund: AM Growth Fund S&P 500 Return 14% 12% Standard 25% 18% deviation Beta 1.15 1.00 If the risk-free rate is currently 4%, which of the following represent the calculation for the Sharpe Ratio and the Treynor measure, respectively, for the AM Growth Fund? A) 0.08 and 0.02 B) 0.56 and 0.12 C) 0.40 and 0.09 Part 2) If the AM Growth Fund is considered to be well-diversified, which measure would be more appropriate in evaluating its risk/return performance? A) The Sharpe ratio B) Jensen's Alpha measure C) The Treynor measure Question 70 - #92759 Which of the following is NOT a recognized weakness of allocation/selection attribution? A) Exposures to the factors need to be determined at the start of an evaluation period B) Security selection decisions have a knock on effect on sector weighting decisions Can be confusing as it reflects the joint effect of allocating weights to both securities and C) sectors Question 71 - #91463 Which of the following least accurately characterizes the time-weighted return? The time-weighted return: A) is similar to the internal rate of return B) can be expensive and error prone is most appropriate for a manager who cannot control the timing of the cash flows in and C) out of the fund Question 72 - #91540 Which of the following statements in relation to the effect of the external interest environment is least accurate? The return due to the external interest rate environment is estimated from a term structure A) analysis of AAA rate corporate securities B) Return on the default-free benchmark assumes no change in the forward rates C) The overall effect represents the performance of a passive, default free bond portfolio Question 73 - #93029 Which of the following statements about risk/return investment manager performance measures is least accurate? The Sharpe measure includes company-specific risk as part of its performance A) measurement When measuring the performance of an equity fund, if the Sharpe ratio is 0.55, and the B) Treynor measure is 0.47, the difference is attributable to unsystematic (company-specific) risk The Treynor measure includes company-specific risk as part of its performance C) measurement Question 74 - #91516 Frank Busby is on the board for a pension fund and would like to evaluate the fund’s performance and determine its sources of return Which of the following is Busby most likely to utilize? A) Micro performance evaluation B) Macro performance evaluation C) Performance decomposition analysis Question 75 - #91436 Which of the following statements about fund performance is CORRECT? A fund had total excess return of 1.82% Of the total, 1.60% was due to the style of the A) fund that was specified by the sponsor, and 0.22% was due to security selection The amount of the excess return that should be credited to the fund manager is 1.82% When analyzing the performance of a bond portfolio the manager should be evaluated B) relative to a style universe Focusing on maturity ranges or a particular market segment is not one of the accepted style universes An equity fund had a return over the past year of 17% and a standard deviation of returns C) of 12% During this period the risk-free return was 3% The Sharpe ratio for the fund was 1.17 Question 76 - #91621 Which of the following least accurately characterizes fundamental factor model attribution and allocation/selection attribution? A) Allocation/selection attribution is relatively easy to calculate Security weights need to be determined at the start of the evaluation period in B) allocation/selection attribution C) Allocation/selection attribution can lead to spurious correlations Question 77 - #91468 Which of the following is the most likely impact of receiving a contribution into an account at the beginning of the period as opposed to the end of the month? Return will be lower because the contribution is added to the assets in the denominator A) and reduces the size of the numerator Return will be unaffected at the impact of the contribution has an equal impact on the B) numerator and denominator Return will be lower because the impact on the numerator outweighs the impact of the C) contribution on the denominator Question 78 - #93020 The Sharpe Ratio is correctly defined as a measure of a fund’s: A) excess return earned compared to its total risk B) excess return earned compared to its systematic risk C) return earned compared to its total risk Question 79 - #92742 Which of the following steps in the constructions of a suitable fundamental factor micro attribution is least accurate? A) Determine the performance of each of the factors B) Identify the fundamental factors that determine unsystematic returns C) Specify a benchmark Question 80 - #92956 Robert Brown is in the process of decomposing the various sources of return to his bond portfolio that yielded a return of 10% The actual treasury yield was 8%, which is 0.5% better than the expected yield of 7.5% In addition, Brown has ascertained that his portfolio benefited by 0.50% due to sector allocation and 0.25% from allocation/selection interaction Based on this information, how much of the portfolio's overall return is attributable to within-sector selection? A) 1.25% B) 1.00% C) 1.75% Question 81 - #91450 The following details are available for the Prime Growth Fund, S&P 500, and U.S Treasury Bills (Tbills) for the 5-year period from 1995 to 2000 Prime Growth S&P 500 T-bill Average annual rate of 12.00% 9.50% 3.00% return Standard deviation of returns 22% 14% Beta 1.12 Part 1) What is the Sharpe ratio for the Prime Growth Fund and for the S&P 500? A) 0.64; 0.29 B) 1.12; 1.00 C) 0.41; 0.46 Part 2) What is the Treynor measure for the Prime Growth Fund and the S&P 500? A) 0.08; 0.07 B) 0.64; 0.29 C) 8.04; 4.91 Question 82 - #91499 The money-weighted return measures the: A) return on the average investment during the period B) total return during the period C) return per unit of domestic currency Question 83 - #93098 Part 1) The following information relates to the Fabregas Pension Fund Value on September 1st $210,000,000 st Contributions received on September $1,050,000 Risk-free returns (per month) 0.4% net contributions value is invested based on the fund sponsor’s $220,369,968 policy allocations Value of the fund passively invested in the aggregate of the manager’s respective if: $221,031,078 benchmarks invested in the aggregate of the manager’s actual portfolios $221,141,594 The actual value of the fund at the end of September was $221,318,507 What was the incremental percentage return contribution attributable to net contributions? A) 0.0% B) 4.9% C) 5.0% Part 2) What was the incremental percentage return contribution attributable to the risk free asset? A) 0.40% B) 0.04% C) 0.39% Part 3) What was the incremental percentage return contribution attributable to Asset Category? A) 4.00% B) 4.94% C) 4.02% Part 4) What was the incremental percentage return contribution attributable to benchmarks? A) 0.30% B) 0.31% C) 0.03% Part 5) What was the incremental percentage return contribution attributable to Investment Managers? A) 0.500% B) 0.050% C) 0.053% Part 6) What was the incremental percentage return contribution attributable to allocation effects? A) 0.800% B) 0.084% C) 0.080% Question 84 - #92940 Which of the following would be least appropriate in macro performance evaluation? A benchmark return is calculated as a weighted average of the individual managers' A) benchmark returns External cash flows would be used to determine the impact of the sponsor’s decision B) making C) Market indices would be used for manager styles Question 85 - #93187 The Information ratio is also referred to as the benefit-cost ratio What is cost defined as? A) The standard deviation of benchmark returns B) The standard deviation of surplus returns C) The standard deviation of portfolio returns Question 86 - #92904 An analyst has gathered the following asset allocations and returns, including an appropriate benchmark, covering the past twelve months for the Triad Fund Fund and Benchmark Weights Fund and Benchmark Returns Asset Class 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 Part 1) The value added to the Triad Fund returns attributable to the pure sector allocation effect is: A) 0.54% B) 0.83% C) 0.16% Part 2) The value added to the Triad Fund returns attributable to the within-sector selection effect is: A) 2.23% B) 1.50% C) 1.96% Question 87 - #92788 Which of the following best describes the impact of survivorship bias on using manager universes as benchmarks? Fund sponsors will terminate underperforming managers, underperforming accounts will A) not survive, and the median will be biased upwards As consistently underperforming funds are terminated by the fund sponsors, the surviving B) funds shrink in number such that in a fairly short period of time the number of funds is too small to allow meaningful benchmarking Fund sponsors are reluctant to terminate underperforming funds, these accounts survive in C) the benchmark, and the median will be biased downwards Question 88 - #92779 Frank Belanger would like to calculate the rate of return for an illiquid asset He states that he will use matrix pricing to obtain a substitute for the security’s current price Which of the following most accurately describes matrix pricing? In matrix pricing, the analyst uses: A) dealer quotes for similar securities B) the price from the last trade for the same security C) an average of recent prices Question 89 - #91485 Which of the following is least likely to be a property of a valid benchmark? A) The benchmark is consistent with the manager’s style B) The weights of the securities in the benchmark should be based on market values C) It is possible for the investor to replicate the benchmark Question 90 - #91451 Peter Michaels, CFA, works at Composite Investment Management Consulting (Composite), where he is in charge of evaluating the performance of all separate account managers that Composite uses for its institutional clientele His main tasks are to measure and evaluate the sources of return that can be attributed to manager performance Michaels understands the importance of incorporating risk into his analyses, but realizes there are limitations associated with some performance measurement techniques in accomplishing that particular objective Currently Michaels is working on an evaluation of the AMG large capitalization growth fund and has assembled the following one-year return information AMG Fund S&P 500 Return 14% 12% Standard Deviation 25% 18% Beta 1.15 1.00 Risk-Free Rate 4% 4% Part 1) The Sharpe and Treynor ratios, respectively, for the AM Growth Fund are: A) -0.44 and -0.10 B) 0.08 and 0.02 C) 0.40 and 0.09 Part 2) If the AM Growth Fund is considered a focused, undiversified portfolio, which measure would be more appropriate in evaluating its risk/return performance? A) The Sharpe ratio B) The Treynor measure C) Jensen's Alpha measure Question 91 - #92968 Custom security-based benchmarks reflect the manager’s investment universe, weighted to reflect a particular approach Which of the following is NOT an advantage of this type of benchmark? A) Allows fund sponsors to effectively allocate risk across investment management teams B) It meets all the required benchmark properties and all of the benchmark validity criteria C) It is cheap to construct and easy to maintain Question 92 - #92960 Which of the following statements best describes the steps required to construct a custom securitybased benchmark? Identify the manager’s investment process including asset selection and weighting; use A) representative assets and long run average weightings for the benchmark; assess and rebalance the benchmark on a predetermined schedule Identify the manager’s investment process including asset selection and weighting; use the B) same assets as the manager and the long run average weighting for the benchmark; assess and rebalance the benchmark on a predetermined schedule Identify the manager’s investment process including asset selection and weighting; use the C) same assets and weighting for the benchmark; assess and rebalance the benchmark on a predetermined schedule Question 93 - #92672 There should be minimal systematic bias in the benchmark relative to the account Which of the following statements about systematic bias is least accurate? A beta significantly below one would be ideal as this would indicate that the manager’s A) account is significantly less risky than the benchmark B) A manager's active decisions should be uncorrelated with the manager’s investment style C) The manager can calculate the historical beta of the account to the benchmark Question 94 - #91441 If a portfolio had an alpha of −10 bps, then the portfolio: A) earned 10 bps less than the market B) had less risk than the market C) earned 10 bps less than the market on a risk-adjusted basis Question 95 - #91478 Which of the following measures used to evaluate the performance of a portfolio manager is (are) NOT subject to the assumptions of the capital asset pricing model (CAPM)? A) Sharpe measure B) Jensen's alpha C) Jensen's alpha and the Treynor measure Question 96 - #92871 An analyst has gathered the following asset allocations and returns for the past twelve months, including an appropriate benchmark, for the Supreme Fund Fund and Benchmark Weights Fund and Benchmark Returns Asset Fund Benchmark Excess Fund Benchmark Excess Class 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 Part 1) Based on the following information and assuming a risk free rate of 5%, what is the Sharpe ratio for the Plumb America index fund? Plumb America S&P 500 Return 22% 18% Std Deviation 30% 22% Beta 1.2 1.0 A) +0.6716 B) +0.5667 C) -0.5776 Part 2) The value added to the Supreme Fund returns attributable to the sector effect is: A) 0.55% B) -0.46% C) -0.19% Part 3) The value added to the Supreme Fund returns attributable to the within-sector effect is: A) 1.06% B) 0.67% C) 0.94% Question 97 - #92943 Which of the following is least likely to be a step in the construction of a custom security-based benchmark? A) Use the same weights for the benchmark as the manager B) Identify the manager’s investment process C) Calculate the historical mean and standard deviation for the benchmark Question 98 - #92860 Flamini Fund has the following results for a micro attribution analysis: Portfolio Benchmark Portfolio Benchmark Sector Economic Sectors Sector Sector Sector Return (%) Weight (%) Weight (%) Return (%) Agricultural 5.21 5.08 -1.03% -1.02% Capital Goods 10.73 11.23 0.87% 0.93% Consumer Durables 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% Cash and equivalents 2.70 2.04 0.02% 0.02% Portfolio 100.00 100.00 1.71% 1.22% Part 1) Using the data from the above table, what is the performance impact due to the financial sector allocation? A) 0.0435% B) 0.0670% C) 0.0221% Part 2) Using the data from the above table, what is the energy within-sector allocation return? A) 0.53% B) 0.42% C) 0.27% Part 3) Using the data from the above table, what is the allocation/selection interaction return for Technology? A) -0.40% B) -0.04% C) +0.04% Question 99 - #91492 What is the goal of performance appraisal? Identification of the sources of differences between portfolio and benchmark risk and A) return B) Identification of overall risk and return C) Interpretation of performance attribution Question 100 - #93096 Jensen’s alpha for a portfolio measures the: fund’s return in excess of the required rate of return given the unsystematic risk of the A) portfolio fund’s return in excess of the required rate of return given the systematic risk of the B) portfolio C) difference between a fund’s return and the market return Question 101 - #92684 Which of the following statements with regard to tests of benchmark quality is CORRECT? An active position is the difference between the weight of a security in the managed A) portfolio versus the benchmark Tracking error is defined as the variance of the excess returns earned due to active B) management An account’s exposure to systematic risk should be similar to those of the benchmark at C) all times Question 102 - #92815 Bud Seilman is the portfolio manager of a well-diversified equity portfolio The following information is available about the portfolio for the latest year Weight Return Asset Class Fund Benchmark Fund Benchmark Large-cap 0.50 0.40 14% 15% Mid-cap 0.30 0.35 19% 12% Small-cap 0.20 0.25 8% 18% Part 1) Using portfolio attribution analysis, what is the sector allocation effect for Seilman’s portfolio? A) –0.4% B) 0.0% C) -0.03% Part 2) Using portfolio attribution analysis, what is the within-sector selection effect for Seilman’s portfolio? A) 0% B) –0.45% C) -0.03% Question 103 - #93016 Kelli Blakely, a portfolio manager with the Miranda Fund, a large cap index fund, achieved a 10.2% return during the past year while the S&P 500 lost 22.5% for the same period Her portfolio consisted of stocks and cash Blakely was able to produce such returns through her exceptional market timing and securities selection skills During the year, the S&P exhibited a standard deviation of 44% while Blakely’s portfolio standard deviation was 37% The calculated beta on the Miranda Fund was 1.10 The market proxy and benchmark for performance measurement purposes is the S&P 500 Using the S&P 500 as a benchmark for the year, the allocation between stock and cash was a constant 97% and 3%, respectively During the year, Blakely was concerned that the combination of a weak economy and geopolitical uncertainties would negatively impact the market returns Taking a bold step, she changed her market allocation to an average of 50% in stocks and 50% in cash Throughout the year, the risk-free rate of cash returns was 2% What is the total value added? A) 21.26% B) 34.70% C) 32.70% Question 104 - #91542 The following table summarizes the performance attribution analysis for two fixed income managers of the Ashburton Fund for the year ending December 31, 2005: Ashley Asset Thierry Asset Bond Portfolio Management Management Benchmark Interest rate effect – expected 0.48 0.48 0.48 Interest rate effect – 0.64 0.64 0.64 unexpected Duration management 0.22 -0.11 0.00 Convexity management -0.10 -0.10 0.00 Yield-curve change 0.08 0.23 0.00 management Sector management -0.12 1.23 0.00 Bond selection management 0.18 -0.16 0.00 Trading Activity 0.07 0.10 0.00 management Total Return 1.45 2.31 1.12 Ashley Asset Management states that its strategy is to outperform the index through active interest rate management and bond selection Thierry Asset Management states its policy is to immunize against interest rate exposure and to earn positive contribution from bond selection Part 1) The two fund manager’s active management process has yielded excess returns over the benchmark How much of the excess performance is attributable to interest rate management effects? Ashley Asset Thierry Asset Management Management A) bps B) 22 bps C) 20 bps 23 bps -11 bps bps Part 2) Given the data in the above table can the manager’s positive performance be attributed primarily to their stated management objectives? Ashley Asset Thierry Asset Management Management A) B) C) Yes Yes No Yes No No Part 3) Which of the following statements about the interest rate effects on the performance of a fixedincome portfolio is least accurate? A) The expected return is the return from implied forward rates B) The expected return is the return form the on-the-run Treasury spot rate curve C) The overall effect represents the performance of a passive default-free bond portfolio Question 105 - #92849 Which of the following would NOT be regarded to be a problem relating to the quality of data used in calculating rates of return? A) Matrix pricing is used for some fixed income securities B) Account valuations include trade date accounting C) When accounts contain illiquid assets, estimates or guesses are used in the calculation ... 5.21 5.08 -1. 03% -1.02% Capital Goods 10. 73 11. 23 0.87% 0. 93% Consumer Durables 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%... 0 .33 3 5 .34 5.92 Cash 0.125 0.167 2 .38 2.47 What is the within-sector selection effect? A) 0 .39 7% B) 0.291% C) 1.085% Question 21 - #91506 Which of the following is NOT a conclusion regarding quality... Deviation 33 % 20% Beta 0.95 1.00 Risk-free rate is 4.00% The Treynor measure and the Sharpe ratio, in that order, for the S&P 500 are: A) 0.25 and 1.25 B) 0 .33 and 0.97 C) 0.18 and 1.11 Question 32