11 Evaluating Portfolio Performance

EvaluatingPortfolioPerformance
TestID:7427843
Question#1of169
QuestionID:465743
Whichofthefollowingisleastlikelytobeutilizedinmacroperformanceevaluation?
A) Beginningofperiodfundvaluations.
B) Externalcashflowsintothefund.
C) Puresectorallocationeffects.
Explanation
Puresectorallocationeffectsresultfrommicroperformanceevaluation.Theinputstomacroperformanceevaluationinclude
policyallocations,benchmarkportfolioreturns,fundreturns,fundvaluations,andexternalcashflows.
Question#2of169
QuestionID:465821
AnanalysthasgatheredthefollowinginformationabouttheperformanceofanequityfundandtheS&P500indexoverthesametime
period.
EquityFundS&P500
Return13%10.5%
StandardDeviation22%20%
Beta1.211.00
Riskfreerateis5.25%
TheTreynormeasurefortheequityfundis:
A) 0.570.
B) 0.064.
C) 0.048.
Explanation
(0.130.0525)/1.21=0.064.
Question#3of169
QuestionID:465861
Whichofthefollowingmeasureswouldbethemostappropriateonetousewhencomparingtheresultsoftwoportfoliosin
whicheachportfoliocontainsmanystocksfromabroadselectionofdifferentindustries?
A) Informationratio.
B) Sharperatio.
C) Treynormeasure.
Explanation
Theequationsforthe3measuresareasfollows:
Treynormeasure=(RPRF)/P
Sharperatio=(RPRF)/P
Informationratio=(RPRB)/(PB)
Sincebothportfoliosarewelldiversifiedmostoftheirriskcomesfromsystematicriskorbetaandistiedtothegenerallevelof
overallriskinthemarket.InthiscasethebestmeasuretousewouldbetheTreynormeasuresincethisusesbetaor
systematicriskasthemeasureofrisk.TheSharperatiousesstandarddeviationasthemeasureofriskinthedenominator
andtheinformationratioisbesttousewhencomparingaportfoliotoabenchmark.
Questions#46of169
ThefollowingtablesummarizestheperformanceattributionanalysisfortwofixedincomemanagersoftheAshburtonFundfor
theyearendingDecember31,2005:
AshleyAsset
ThierryAsset
BondPortfolio
Management
Management
Benchmark
0.48
0.48
0.48
0.64
0.64
0.64
Durationmanagement
0.22
0.11
0.00
Convexitymanagement
0.10
0.10
0.00
Yieldcurvechange
0.08
0.23
0.00
Sectormanagement
0.12
1.23
0.00
Bondselection
0.18
0.16
0.00
0.07
0.10
0.00
1.45
2.31
1.12
Interestrateeffect
expected
Interestrateeffect
unexpected
management
management
TradingActivity
management
TotalReturn
AshleyAssetManagementstatesthatitsstrategyistooutperformtheindexthroughactiveinterestratemanagementand
bondselection.
ThierryAssetManagementstatesitspolicyistoimmunizeagainstinterestrateexposureandtoearnpositivecontributionfrom
bondselection.
Question#4of169
QuestionID:465789
Thetwofundmanager'sactivemanagementprocesshasyieldedexcessreturnsoverthebenchmark.Howmuchofthe
excessperformanceisattributabletointerestratemanagementeffects?
AshleyAssetManagement
ThierryAssetManagement
A) 20bps2bps
B) 8bps23bps
C) 22bps11bps
Explanation
Theinterestratemanagementeffectisacombinationoftheimpactsof1)durationmanagement2)convexitymanagement
and3)Yieldcurvechangemanagement.
Question#5of169
QuestionID:465790
Giventhedataintheabovetablecanthemanager'spositiveperformancebeattributedprimarilytotheirstatedmanagement
objectives?
AshleyAssetManagement
ThierryAssetManagement
A) NoNo
B) YesYes
C) YesNo
Explanation
AshleyAssetManagementexceededthebenchmarkby33bps.Interestratemanagementhasadded20bps(22bps10bps+
8bps)andbondselection18bps.Thisisatotalof38bps,whichismorethan100%oftheiroutperformance.
ThierryAssetManagementexceededthebenchmarkby119bps.Immunizationagainstinterestrateexposureadded2bpsand
bondselectionreducedperformanceby16bpsanoverallimpactof14bps.ClearlyThierryAssetManagementdidnotadd
contributionthroughtheirstatedobjective,mostofitcamefromsectorselection!
Question#6of169
QuestionID:465791
Whichofthefollowingstatementsabouttheinterestrateeffectsontheperformanceofafixedincomeportfolioisleast
accurate?
A) Theoveralleffectrepresentstheperformanceofapassivedefaultfreebond
portfolio.
B) TheexpectedreturnisthereturnfromtheontherunTreasuryspotratecurve.
C) Theexpectedreturnisthereturnfromimpliedforwardrates.
Explanation
Theexpectedreturnisthereturnimpliedbyforwardrates,nottheontherunTreasuryspotratecurve.Althoughtheforward
ratesarederivedfromthespotrates,atwoyearspotrateisnotthesameastheexpectedforwardrateintwoyearstime.
Question#7of169
QuestionID:465687
Whatisthegoalofperformanceappraisal?
A) Identificationofoverallriskandreturn.
B) Identificationofthesourcesofdifferencesbetweenportfolioandbenchmarkriskand
return.
C) Interpretationofperformanceattribution.
Explanation
Performanceappraisalinvolvestheinterpretationofperformanceattribution.Ajudgmentismadeaboutmanager'sdecisions
andskill,inanefforttodifferentiatebetweenreturnsattributabletoluckandthoseattributabletoskill.
Question#8of169
QuestionID:465820
RobertMeznariscurrentlyemployedasaseniorsoftwarearchitectinalargeestablishedsoftwarecompany.Heis38years
old,andhiscurrentsalaryis$80,000aftertax.Meznarrecentlysoldhisstock(acquiredthroughstockoptions)inanInternet
startupcompany.Theentireproceedsof$2millionisheldintreasurysecurities.
Meznariscurrentlymarriedwith3children.Heisconcernedwiththepotentialeducationalexpensesofhischildrenandwants
tosetaside$500,000forhisfavoritecharitableorganization.Thefamilyneeds$150,000tomaintainitscurrentlifestyle.The
expectedinflationrateis6%andMeznarpaysa20%taxrateonhisinvestmentincome.Meznardoessomeinvestment
researchonhisown,isconfident,carefulandmethodical,andtriestoavoidextremevolatility.However,hehasastrong
preferenceforgood,brandnamecompanies.
JohnSnow,CFA,ofCapitalAssociateshasbeenforwardedthefileofMeznartosuggestanappropriateportfolio.Snowrelies
heavilyonthefollowingforecasts,furnishedbythefirm,forlongtermreturnsfordifferentassetclasses.Hehasalready
developedthreepossibleportfoliosforMeznar.
AssetClass
Return
U.S.Stock
Standard
Deviation
12.0%
16%
40%
30%
25%
NonU.S.Stocks
14.0
24%
15
25%
U.S.Corporatebonds
7.0
10%
60
15
MunicipalBonds
5.0
8%
20
25
REIT
14
14%
20
25
AssumetheexpectedstandarddeviationofX,Y,andZare10.74%,19%,and22%respectively.Iftheriskfreerateis5%,
whataretheSharperatiomeasuresofportfolioX,YandZ?
X
A) 0.83
0.55
0.46
B) 0.37
0.29
0.28
C) 3.46
1.52
1.09
Explanation
SharpeRatio=(ExpectedReturnRiskFreeRate)/StandardDeviation
PortfolioX:SharpeRatio=(0.090.05)/0.1074=0.372
PortfolioY:SharpeRatio=(0.1050.05)/0.19=0.289
PortfolioZ:SharpeRatio=(0.11250.05)/0.22=0.284
Question#9of169
QuestionID:465811
TheSharpeRatioiscorrectlydefinedasameasureofafund's:
A) excessreturnearnedcomparedtoitstotalrisk.
B) excessreturnearnedcomparedtoitssystematicrisk.
C) returnearnedcomparedtoitstotalrisk.
Explanation
TheSharperatioisdefinedasafund'sexcessreturn(fund'sreturnminustheriskfreerate)dividedbythetotalrisk(standard
deviation).
Question#10of169
QuestionID:465723
Customsecuritybasedbenchmarksreflectthemanager'sinvestmentuniverse,weightedtoreflectaparticularapproach.
WhichofthefollowingisNOTanadvantageofthistypeofbenchmark?
A) Allowsfundsponsorstoeffectivelyallocateriskacrossinvestment
managementteams.
B) Itischeaptoconstructandeasytomaintain.
C) Itmeetsalltherequiredbenchmarkpropertiesandallofthebenchmarkvalidity
criteria.
Explanation
Amajordisadvantageofcustomsecuritybasedbenchmarksisthattheycanbeexpensivetoconstructandmaintain.The
otherstatementsareregardedtobeadvantagesofusingcustomsecuritybasedbenchmarks.
Question#11of169
QuestionID:465697
Foraglobalportfolio,themoneyweightedreturnsforthefourquartersoflastyearare:3%,2%,5%,and2.5%.The
correspondingtimeweightedreturnsare:2.5%,1%,4%,and3.5%.Whatwouldaninvestorreportastheannualrateof
returnontheportfolio?
A) 9.23%.
B) 8.64%.
C) 9.0%.
Explanation
Forreportingpurposes,timeweightedreturnisreported.Annualreturn=1.0250.991.041.0351=0.0923or9.23%.
Questions#1213of169
Ananalysthasgatheredthefollowingassetallocationsandreturns,includinganappropriatebenchmark,coveringthepast
twelvemonthsfortheTriadFund.
FundandBenchmarkWeights
FundandBenchmarkReturns
AssetClass
Fund
Benchmark
Fund
Benchmark
Stock
0.65
0.50
17.00
13.80
Bonds
0.25
0.40
8.10
8.30
Cash
0.10
0.10
3.85
4.05
Question#12of169
QuestionID:465753
ThevalueaddedtotheTriadFundreturnsattributabletothepuresectorallocationeffectis:
A) 0.83%.
B) 0.54%.
C) 0.16%.
Explanation
Attributabletothepuresectorallocationeffect:(0.650.50)(13.810.63)+(0.250.40)(8.310.63)+(0.100.10)(4.05
10.63)=0.83%.
Thebenchmarkreturniscalculatedastheweightedaverageofindividualassetreturnsinthebenchmark:(.5x13.8)+(.4x
8.3)+(.1x4.05)=10.63%
Question#13of169
QuestionID:465754
ThevalueaddedtotheTriadFundreturnsattributabletothewithinsectorselectioneffectis:
A) 1.96%.
B) 1.50%.
C) 2.23%.
Explanation
Attributabletothewithinsectorselectioneffect:(0.5)(17.013.8)+(0.4)(8.18.3)+(0.10)(3.854.05)=1.5%.
Question#14of169
QuestionID:465738
Whichofthefollowingwouldberegardedastheleastappropriatemethodtomeasuretheperformanceofahedgefund?
A) Separatelong/shortbenchmarks.
B) TheSharperatio.
C) Relativeperformancecomparisonswithtraditionalbenchmarks.
Explanation
Constructaseparatelongandshortbenchmark,whichcanthenbecombinedtogetherintheirrelevantproportions.The
Sharperatiocomparesthereturntoriskfreeratherthanabenchmark.Relativeperformanceusingtraditionalbenchmarksis
theleastappropriategivenhedgefundsconcentrationonabsolutereturnsandthelackofreliabletraditionalbenchmarks.
Question#15of169
QuestionID:465718
Accountsthatcontainilliquidassetspresentadditionalproblemsofaccuratelymeasuringreturn.Whichofthefollowing
statementswouldNOTberegardedasaproblemassociateddirectlywithilliquidassets?
A) Assetsarecarriedatthepriceofthelasttrade.
B) Accountvaluationsusetradedateaccountingasopposedtosettlementaccounting.
C) Matrixpricingisused.
Explanation
Theuseoftradedateaccountingisregardedtobeakeyfeatureofagoodreturnmeasurementprocess.Theotheroptions
areexamplesoftheproblemscausedwhenilliquidassetsareincludedintheaccount.Matrixpricingisusingthequotedprice
ofasimilarassetasaproxyforthemarketvalueofthinlytradedfixedincomesecurities.
Question#16of169
QuestionID:465729
Whichofthefollowingstatementsbestdescribesthestepsrequiredtoconstructacustomsecuritybasedbenchmark?
A) Identifythemanager'sinvestmentprocessincludingassetselectionand
weightinguserepresentativeassetsandlongrunaverageweightingsforthe
benchmarkassessandrebalancethebenchmarkonapredetermined
schedule.
B) Identifythemanager'sinvestmentprocessincludingassetselectionandweighting
usethesameassetsandweightingforthebenchmarkassessandrebalancethe
benchmarkonapredeterminedschedule.
C) Identifythemanager'sinvestmentprocessincludingassetselectionandweighting
usethesameassetsasthemanagerandthelongrunaverageweightingforthe
benchmarkassessandrebalancethebenchmarkonapredeterminedschedule.
Explanation
Thethreestepsrequiredtoconstructacustomsecuritybasedbenchmarkareasfollows:
1.Identifythemanager'sinvestmentprocessincludingassetselectionandweighting.
2.Usethesameassetsandweightingforthebenchmark.
3.Assessandrebalancethebenchmarkonapredeterminedschedule.
Question#17of169
QuestionID:465696
Whatisthemajordifferencebetweenthemoneyweightedandtimeweightedrateofreturn?Themoneyweightedreturn:
A) penalizesmanagersforcashflowsthatoccuroutsideoftheircontrolwhilethe
timeweightedreturndoesnot.
B) computesthereturnmorepreciselyusingtheinternalrateofreturncomputationwhile
timeweightedreturncomputationisanapproximation.
C) isaveragedacrossperiodstoarriveatanannualrateofreturnwhilethetime
weightedreturniscompoundedacrossperiodstoarriveatanannualrateofreturn.
Explanation
Thetimeweightedreturniscomputedeverytimeacashflowoccurs,soitdoesnotpenalizemanagersforcashflowsthat
occuroutsideoftheircontrol.Themoneyweightedreturn,ontheotherhand,isimpactedbycashflows.Notethatan
approximationfordifferenttimeperiodscanbemadewhenusingthetimeweightedreturn,however,usinganapproximation
wouldbeatthediscretionofthepersoncalculatingthereturnandisnotpartofthemethodologybehindthetimeweighted
returncalculation.
Question#18of169
QuestionID:465867
WhichofthefollowingisNOTaconclusionregardingqualitycontrolchartsandhowtheyaretypicallyusedtoevaluate
managerperformance?
A) Thisisatwotailedtest.
B) KeepingamanagerwhogeneratesnovalueaddedwouldbeaTypeIerror.
C) H0willbethatthemanageraddsnovalueHaisthatthemanageraddspositivevalue.
Explanation
Thetestissetupasnull,themanagergeneratesnoaddedvalueandthealternativeisthatthemanageraddsvalue.Sowe
arelookingforpositiveaddedvaluewhichisaonetailedtest.Therefore,thealternativewillbethatthemanagergenerates
positivevalueadded.
Question#19of169
QuestionID:465720
Whichofthefollowingisthemostappropriatemethodofcalculatingthemanager'sactivereturn?Themanager'sactivereturn
isthe:
A) portfolioreturnminusthemarketreturn.
B) marketreturnminusthebenchmarkreturn.
C) portfolioreturnminusthebenchmarkreturn.
Explanation
Themanager'sactivereturnistheportfolioreturnminusthebenchmarkreturn,wherethebenchmarkisappropriatetothe
manager'sstyle.
Questions#2022of169
Ananalysthasgatheredthefollowingassetallocationsandreturnsforthepasttwelvemonths,includinganappropriatebenchmark,for
theSupremeFund.
FundandBenchmarkWeights
AssetClass
Fund
Benchmark
Stock
0.50
Bonds
Cash
FundandBenchmarkReturns
Excess
Fund
Benchmark
0.60
0.10
14.50
12.90
1.60
0.45
0.30
0.15
7.20
6.90
0.30
0.05
0.10
0.05
4.20
4.10
0.10
Question#20of169
Excess
QuestionID:465756
Basedonthefollowinginformationandassumingariskfreerateof5%,whatistheSharperatioforthePlumbAmericaindex
fund?
PlumbAmerica S&P500
Return
22%
18%
Std.Deviation
30%
22%
1.2
1.0
Beta
A) +0.6716.
B) +0.5667.
C) 0.5776.
Explanation
Sharperatio=(Returnriskfreerate)/std.deviation=(0.220.05)/0.30=0.5667
Question#21of169
QuestionID:465757
ThevalueaddedtotheSupremeFundreturnsattributabletothesectoreffectis:
A) 0.19%.
B) 0.55%.
C) 0.46%.
Explanation
Thebenchmarkreturnis(.6x12.9)+(.3x6.9)+(.1x4.1)=10.22
Attributabletothesectoreffect:(0.500.60)(12.910.22)+(0.450.30)(6.910.22)+(0.050.10)(4.110.22)=0.46%.
Question#22of169
QuestionID:465758
ThevalueaddedtotheSupremeFundreturnsattributabletothewithinsectoreffectis:
A) 1.06%.
B) 0.94%.
C) 0.67%.
Explanation
Attributabletothewithinsectoreffect:(0.60)(14.512.9)+(0.30)(7.26.9)+(0.10)(4.24.1)=1.06%.
Question#23of169
QuestionID:465864
Whenconstructingaqualitycontrolchartwhichofthefollowingisanimportantassumptionthatismadeaboutthedistribution
ofthemanager'svalueaddedreturns?
A) Theinvestmentprocessisconsistentthusensuringthatahighdegreeofthe
errorterminoneperiodcanbeexplainedbytheerrortermintheprevious
period.
B) Valueaddedreturnsareindependentfromperiodtoperiodandnormallydistributed.
C) Thenullhypothesisstatesthattheexpectedvalueaddedreturnistheriskfreerateof
return.
Explanation
Thenullhypothesisstatesthattheexpectedvalueaddedreturniszero.Wearetestingthemanager'sabilitytogenerate
positiveexpectedvalueaddedreturns.Wewantaconsistentprocesstoensurethatthedistributionofvalueaddedreturns
abouttheirmeanisconstant.Wedoindeedassumethatvalueaddedreturnsareindependentfromoneperiodtothenext
andnormallydistributed.
Questions#2425of169
MarkusSmith,CFA,islookingatdifferentmeasuresofriskforbondportfoliosaswellasstockandbondmutualfunds.Hehas
severalprojectscurrentlyunderway.
Smith'sfirstprojectistodecomposethevarioussourcesofreturnfortheBBBBondFund(BBB)whichyieldedareturnof12%.
Theactualtreasuryyieldwas8%,whichis1.0%betterthantheexpectedyieldof7.0%.Inaddition,Smithhasascertainedthat
theBBBportfoliobenefitedby0.50%duetomaturitymanagementand1.25%fromspread/qualitymanagement.
Smith'ssecondprojectinvolvesAAABondFund(AAA).Smithgathersthefollowingdata:
ActualAAAportfolioreturn=10%(durationofportfolio=10years).
LehmanBrothersBenchmarkIndexreturn=8%(durationofportfolio=8years).
Accordingtothebondmarketline(BML),thereturnforaportfoliowitha10yeardurationshouldbe9%.
TheAAABondFund'slongtermstrategicportfoliohasadurationof9years,andatargetreturnof8.5%.
Smithnowturnshisattentiontowardshisthirdproject,StarEquityFund.Thetablebelowdetailsrelevantinformation:
AssetClass StarFundWeights StarFundReturns BenchmarkReturns

Stocks
0.95
12%
14%
Cash
0.05
4%
5%
OverallStarFundreturn=11.60%
Overallbenchmarkreturn=13.82%
Smith'slastprojectisforthePlumbAmericaIndexFund.
PlumbAmerica S&P500
Return
22%
18%
StandardDeviation
30%
22%
Beta
1.2
1.0
Question#24of169
QuestionID:465853
Assumingariskfreerateof5%,whatistheTreynormeasureforthePlumbAmericaIndexFund?
A) +0.1417.
B) 0.1714.
C) +0.2716.
Explanation
Treynor'smeasure=(Returnriskfreerate)/beta=(0.220.05)/1.2=0.1417
Question#25of169
QuestionID:465854
Assumingariskfreerateof5%,whatistheSharperatioforthePlumbAmericaIndexFund?
A) +0.6716.
B) +0.5667.
C) 0.5776.
Explanation
Sharperatio=(Returnriskfreerate)/std.deviation=(0.220.05)/0.30=0.5667
Question#26of169
QuestionID:465805
period.
EquityFundS&P500
Return12%16%
Beta1.181.00
Riskfreerateis6.00%
ThedifferencebetweentheTreynormeasurefortheequityfundandtheTreynormeasurefortheS&P500is:
A) 0.15.
B) 0.07.
C) 0.17.
Explanation
Theequityfund:(0.120.06)/1.18=0.15
TheS&P500:(0.160.06)/1.00=0.22
Theequityfundis(0.15(0.22)=0.07higher
Question#27of169
QuestionID:465722
Giventhefollowingdata,howisthemanager'sperformancemostaccuratelycharacterized?
Manager'sReturn
7.6%
BenchmarkReturn
6.2%
MarketIndexReturn
8.8%
A) Themanagerearnedanexcessreturnfromstylebutnotfromactive
management.
B) Themanagerearnedanexcessreturnfromactivemanagementbutnotfromstyle.
C) Themanagerearnedanexcessreturnfromstyleandactivemanagement.
Explanation
Themanagerearnedareturnfromactivemanagement,wheretheactivereturnisthemanager'sreturnminusthebenchmark
return(7.60%6.20%=1.40%).Themanagerdidnotearnareturnfromstyle,wherethestylereturnisthebenchmarkreturn
minusthemarketreturn(6.20%8.80%=2.60%).
Question#28of169
QuestionID:465749
ThefollowingdatapertainstotheUBZBalancedFund:
AssetClass FundWeight BenchmarkWeight FundReturn(%) BenchmarkReturn(%)

Stock
0.625
0.500
9.85
8.64
Bond
0.250
0.333
5.34
5.92
Cash
0.125
0.167
2.38
2.47
Whatisthewithinsectorselectioneffect?
A) 0.291%.
B) 0.397%.
C) 1.085%.
Explanation
Thewithinsectorselectioneffect=[(benchmarkweight)(fundsegmentreturnbench.segmentreturn)]
=[(0.5)(9.858.64)]+[(0.333)(5.345.92)]+[(0.167)(2.382.47)]=0.397%.
Questions#2930of169
PeterMichaels,CFA,worksatCompositeConsulting,andisinchargeofevaluatingtheperformanceofvariousportfolio
managers.Hismaintasksaretomeasureandevaluatethesourcesofreturnthatcanbeattributedtomanagerperformance.
Michaelsunderstandstheimportanceofincorporatingriskintohisanalyses,butrealizesthelimitationsassociatedwithsome
performancemeasurementtechniquesinaccomplishingthatparticularobjective.Michaelsbeginstheevaluationofanumber
ofmanagersbyexaminingreturninformationfromboththeportfoliobeingevaluatedanditsdesignatedbenchmark.
Question#29of169
QuestionID:465794
MichaelshasthefollowingreturninformationfortheAMGrowthFund:
AMGrowthFund S&P500
Return
14%
12%
Standard
25%
18%
1.15
1.00
deviation
Beta
Iftheriskfreerateiscurrently4%,whichofthefollowingrepresentthecalculationfortheSharpeRatioandtheTreynor
measure,respectively,fortheAMGrowthFund?
A) 0.56and0.12.
B) 0.40and0.09.
C) 0.08and0.02.
Explanation
TheSharperatioisthedifferencebetweentheGrowthFundreturnandtheriskfreeratedividedbytheGrowthFundstandard
deviation[(0.140.04)/0.25=0.40].TheTreynormeasureisthedifferencebetweentheGrowthFundreturnandtheriskfree
ratedividedbytheGrowthFundBeta[(0.140.04)/1.15=0.09].
Question#30of169
QuestionID:465795
IftheAMGrowthFundisconsideredtobewelldiversified,whichmeasurewouldbemoreappropriateinevaluatingits
risk/returnperformance?
A) TheTreynormeasure.
B) Jensen'sAlphameasure.
C) TheSharperatio.
Explanation
IftheAMGrowthFundiswelldiversified,theappropriateriskmeasurewouldbebeta,orthesystematicriskcomponentof
totalrisk.Therefore,theTreynormeasurewouldbeappropriateinthiscase.
Question#31of169
QuestionID:465765
Incomparingmacroandmicroperformanceattributionmethodologiestoevaluatethedriversofinvestmentperformance,itis
mostcorrecttosaythat:
A) bothmacroandmicroevaluationfocusonthedeviationsfrombenchmarks.
B) microevaluationisanincrementalapproachandmacroevaluationfocuseson
deviationsfrombenchmarks.
C) macroevaluationisanincrementalapproachandmicroevaluationfocuseson
deviationsfrombenchmarks.
Explanation
Thisisthemostcorrectstatement.Themacroevaluationlooksatthebeginningandendingvaluesoftheentirefundand
attributesthereturncontributedateachlevelofdecisionmaking.Microevaluationlooksatindividualportfoliosandtriesto
explainitsreturnwithrespecttoitsdeviationfromabenchmark.
Question#32of169
QuestionID:465717
FrankBelangerwouldliketocalculatetherateofreturnforanilliquidasset.Hestatesthathewillusematrixpricingtoobtaina
substituteforthesecurity'scurrentprice.Whichofthefollowingmostaccuratelydescribesmatrixpricing?Inmatrixpricing,the
analystuses:
A) thepricefromthelasttradeforthesamesecurity.
B) anaverageofrecentprices.
C) dealerquotesforsimilarsecurities.
Explanation
Matrixpricingisusedwhentheassetisilliquidandasecuritypriceisnotreadilyavailable.Inmatrixpricing,theanalystuses
dealerquotedpricesforsimilarsecurities.
Question#33of169
QuestionID:465822
Whichofthefollowingmeasuresusedtoevaluatetheperformanceofaportfoliomanageris(are)NOTsubjecttothe
assumptionsofthecapitalassetpricingmodel(CAPM)?
A) Jensen'salphaandtheTreynormeasure.
B) Jensen'salpha.
C) Sharpemeasure.
Explanation
BoththeTreynormeasureandtheJensen'salphaassumethattheCAPMistheunderlyingriskadjustmentmodel.The
Sharpemeasureontheotherhanddoesnotmakethisassumption.Itusestotalriskofaportfolio,unliketheTreynormeasure
andJensen'salpha,whichusethesystematic(undiversifiable)riskasmeasuredbybetatocomputetheriskadjustedreturnof
aportfolio.
Question#34of169
QuestionID:465855
WhichofthefollowingstatementsregardingtheSharperatioismostaccurate?
A) ThedenominatoroftheSharperatioisstandarddeviationwhichiscomprised
partlyofsystematicriskcalledbeta.
B) BetaisnotacomponentoftheSharperatio.
C) ThemeasureofriskusedinthedenominatoroftheSharperatioisstandarddeviation
alsoknownasunsystematicrisk.
Explanation
TheequationfortheSharperatio=(RPRF)/P.
TheSharperatiocontainsstandarddeviationinthedenominatoroftheequationwhichistotalriskandiscomprisedofboth
systematicriskcalledbetaandunsystematicriskthustheSharperatiodoescontainacomponentofbeta.
Question#35of169
QuestionID:465870
Supposethataportfoliomanagementfirmhasabnormallyhighturnoverintheirstaff.Whichofthefollowingisthemostlikely
scenario?
A) Thefirm'sTypeIerrorrateishighandtheirTypeIIerrorrateishigh.
B) Thefirm'sTypeIerrorrateishighandtheirTypeIIerrorrateislow.
C) Thefirm'sTypeIerrorrateislowandtheirTypeIIerrorrateishigh.
Explanation
TypeIerrorisretainingapoormanagerandTypeIIerrorisfiringasuperiormanager.Ifafirmhashighturnoverinstaff,itis
unlikelytheyareretainingpoormanagersbutmorelikelythattheyarefiringgoodmanagers.
Question#36of169
QuestionID:465860
Whichofthefollowingmeasureswouldbethemostappropriateonetousewhencomparingtheresultsoftwoportfoliosin
whicheachportfoliocontainsonlyafewnumberofstocksrepresentingalimitednumberofindustries?
A) Informationratio.
B) Treynormeasure.
C) Sharperatio.
Explanation
Sincebothportfoliosarenotwelldiversifiedmostoftheirriskcomesfromunsystematic(companyspecific)riskandisnottied
totheoveralllevelofriskinthemarketthusinthiscasestandarddeviationisthebestmeasureofrisktouse.TheSharperatio
isthebestmeasuretousetocomparethetwoportfolioswhichareundiversifiedsincetheSharperatiousesstandard
deviationortotalriskinthedenominatoroftheequationasitsmeasureofrisk.TheTreynormeasureusesbetaorsystematic
marketriskasthemeasureofriskinthedenominatorandtheinformationratioisbesttousewhencomparingaportfoliotoa
benchmark.
Question#37of169
QuestionID:465724
Allofthefollowingwouldberegardedasaspecificdisadvantageoffactorbasedmodels,EXCEPT:
A) itispossibletoconstructmultiplebenchmarks,allhavingthesamefactor
exposuresbutwithdifferentreturns.
B) thebenchmarkmaynotbeinvestable.
C) themanager'sstylemaydeviatefromthestylereflectedinthebenchmark.
Explanation
Themanager'sstylemaydeviatefromthestylereflectedinthebenchmarkisaweaknessofbroadbasedmarketindexesnot
factormodelbasedbenchmarks.Theotherstatementsareregardedtobedisadvantagesoffactormodelbasedbenchmarks.
Question#38of169
WhichofthefollowingstatementsaboutfundperformanceisCORRECT?
A) Afundhadtotalexcessreturnof1.82%.Ofthetotal,1.60%wasduetothestyle
ofthefundthatwasspecifiedbythesponsor,and0.22%wasduetosecurity
selection.Theamountoftheexcessreturnthatshouldbecreditedtothefund
manageris1.82%.
B) Whenanalyzingtheperformanceofabondportfoliothemanagershouldbeevaluated
relativetoastyleuniverse.Focusingonmaturityrangesoraparticularmarket
segmentisnotoneoftheacceptedstyleuniverses.
QuestionID:465798
C) Anequityfundhadareturnoverthepastyearof17%andastandarddeviationof
returnsof12%.Duringthisperiodtheriskfreereturnwas3%.TheSharperatiofor
thefundwas1.17.
Explanation
TheSharperatio=(0.170.03)0.12=1.17.
Notethatfocusingonmaturityrangesoraparticularmarketsegmentaredefinitionsofstyleforabondportfoliomanager.
Also,managerswhosestylesarespecifiedforthemshouldonlygetcreditfortheexcessreturnthatisduetosecurity
selection.
Questions#3944of169
Question#39of169
QuestionID:465774
ThefollowinginformationrelatestotheFabregasPensionFund.
ValueonSeptember1st
$210,000,000
ContributionsreceivedonSeptember1st
$1,050,000
Riskfreereturns(permonth)
0.4%
netcontributionsvalueisinvestedbasedonthefundsponsor'spolicyallocations $220,369,968
Valueofthefundif: passivelyinvestedintheaggregateofthemanager'srespectivebenchmarks
investedintheaggregateofthemanager'sactualportfolios
$221,031,078
$221,141,594
TheactualvalueofthefundattheendofSeptemberwas
$221,318,507
Whatwastheincrementalpercentagereturncontributionattributabletonetcontributions?
A) 5.0%.
B) 0.0%.
C) 4.9%.
Explanation
DecisionMakingLevel FundValue Incremental%ReturnContribution IncrementalValueContribution
Beginningvalue
$210,000,000
Netcontributions
$211,050,000
0.0%
$1,050,000
($211,050,0000.4%)
$211,894,200
0.4%
$844,200
AssetCategory
$220,369,968
4.0%
$8,475,768
Riskfreeasset
Benchmarks
$221,031,078
0.3%
$661,110
InvestmentManagers
$221,141,594
0.05%
$110,516
AllocationEffects
$221,318,507
0.08%
$176,913
TotalFund
$221,318,507
4.83%
$11,318,507
(StudySession17,LOS34.l)
Question#40of169
QuestionID:465775
Whatwastheincrementalpercentagereturncontributionattributabletotheriskfreeasset?
A) 0.40%.
B) 0.04%.
C) 0.39%.
Explanation
Beginningvalue
$210,000,000
Netcontributions
$211,050,000
0.0%
$1,050,000
($211,050,0000.4%)
$211,894,200
0.4%
$844,200
AssetCategory
$220,369,968
4.0%
$8,475,768
Benchmarks
$221,031,078
0.3%
$661,110
$221,141,594
0.05%
$110,516
AllocationEffects
$221,318,507
0.08%
$176,913
TotalFund
$221,318,507
4.83%
$11,318,507
Riskfreeasset
InvestmentManagers
Question#41of169
QuestionID:465776
WhatwastheincrementalpercentagereturncontributionattributabletoAssetCategory?
A) 4.02%.
B) 4.00%.
C) 4.94%.
Explanation
Beginningvalue
$210,000,000
Netcontributions
$211,050,000
0.0%
$1,050,000
($211,050,0000.4%)
$211,894,200
0.4%
$844,200
AssetCategory
$220,369,968
4.0%
$8,475,768
Benchmarks
$221,031,078
0.3%
$661,110
InvestmentManagers
$221,141,594
0.05%
$110,516
AllocationEffects
$221,318,507
0.08%
$176,913
TotalFund
$221,318,507
4.83%
$11,318,507
Riskfreeasset
Question#42of169
QuestionID:465777
Whatwastheincrementalpercentagereturncontributionattributabletobenchmarks?
A) 0.30%.
B) 0.03%.
C) 0.31%.
Explanation
Beginningvalue
$210,000,000
Netcontributions
$211,050,000
0.0%
$1,050,000
($211,050,0000.4%)
$211,894,200
0.4%
$844,200
AssetCategory
$220,369,968
4.0%
$8,475,768
Benchmarks
$221,031,078
0.3%
$661,110
InvestmentManagers
$221,141,594
0.05%
$110,516
AllocationEffects
$221,318,507
0.08%
$176,913
TotalFund
$221,318,507
4.83%
$11,318,507
Riskfreeasset
Question#43of169
WhatwastheincrementalpercentagereturncontributionattributabletoInvestmentManagers?
A) 0.500%.
QuestionID:465778
B) 0.050%.
C) 0.053%.
Explanation
Beginningvalue
$210,000,000
Netcontributions
$211,050,000
0.0%
$1,050,000
($211,050,0000.4%)
$211,894,200
0.4%
$844,200
AssetCategory
$220,369,968
4.0%
$8,475,768
Benchmarks
$221,031,078
0.3%
$661,110
InvestmentManagers
$221,141,594
0.05%
$110,516
AllocationEffects
$221,318,507
0.08%
$176,913
TotalFund
$221,318,507
4.83%
$11,318,507
Riskfreeasset
Question#44of169
QuestionID:465779
Whatwastheincrementalpercentagereturncontributionattributabletoallocationeffects?
A) 0.080%.
B) 0.800%.
C) 0.084%.
Explanation
Beginningvalue
$210,000,000
Netcontributions
$211,050,000
0.0%
$1,050,000
($211,050,0000.4%)
$211,894,200
0.4%
$844,200
AssetCategory
$220,369,968
4.0%
$8,475,768
Benchmarks
$221,031,078
0.3%
$661,110
InvestmentManagers
$221,141,594
0.05%
$110,516
AllocationEffects
$221,318,507
0.08%
$176,913
Riskfreeasset
TotalFund
$221,318,507
4.83%
$11,318,507
Question#45of169
QuestionID:465869
Supposethatallofafirm'smanagersareoutperformingthebenchmark,somebyalittle,somebyalot.Iftheconfidence
intervalsforaqualitycontrolchartsinportfoliomanagementwerewidened,whatwouldthemostlikelyeffectbe?
A) TypeIerrorwouldbecomelesslikelyandTypeIIerrorwouldbecomemore
likely.
B) TypeIerrorwouldbecomemorelikelyandTypeIIerrorwouldbecomelesslikely.
C) TypeIerrorwouldbecomemorelikelyandTypeIIerrorwouldbecomemorelikely.
Explanation
TypeIerrorisretainingapoorlyperformingmanager.Iftheconfidenceintervalsarewidenedandapoormanagerisbarely
outperformingthebenchmark,itislesslikelythattheywillhavestatisticallysignificantexcessreturns.Wearethusmorelikely
tofirethemandhencelesslikelytocommitTypeIerror.Atthesametime,wemaybefiringgoodmanagerswhoare
outperformingthebenchmarkbutyetdonothavestatisticallysignificantexcessreturns.Wearethusmorelikelytocommit
TypeIIerrorasTypeIIerrorisfiringasuperiormanager.
Question#46of169
QuestionID:465866
Supposethataportfoliomanagementfirmhasdecidedthatthecostsofhiringandfiringmanagersareexcessive.Whichof
thefollowingwouldbetheirmostappropriatecourseofaction?Thefirmshould:
A) toleratemoreTypeIerrortoreduceTypeIIerror.
B) toleratemoreTypeIIerrortoreduceTypeIerror.
C) reducebothTypeIandTypeIIerrors.
Explanation
TypeIerrorisretainingapoormanagerandTypeIIerrorisfiringasuperiormanager.Ifafirmwishestoreducethecostsof
hiringandfiringmanagers,thentheyshouldreducestaffturnover.Sotheyshoulderronthesideofretainingpoormanagers
(TypeIerror)toreducethechanceoffiringsuperiormanagers(TypeIIerror).Theymightdothisbyrelaxingtheperformance
criteriamanagersmustmeet.
Questions#4748of169
PeterMichaels,CFA,worksatCompositeInvestmentManagementConsulting(Composite),whereheisinchargeof
evaluatingtheperformanceofallseparateaccountmanagersthatCompositeusesforitsinstitutionalclientele.Hismaintasks
aretomeasureandevaluatethesourcesofreturnthatcanbeattributedtomanagerperformance.Michaelsunderstandsthe
importanceofincorporatingriskintohisanalyses,butrealizestherearelimitationsassociatedwithsomeperformance
measurementtechniquesinaccomplishingthatparticularobjective.
CurrentlyMichaelsisworkingonanevaluationoftheAMGlargecapitalizationgrowthfundandhasassembledthefollowing
oneyearreturninformation.
AMGFund
S&P500
Return
14%
12%
StandardDeviation
25%
18%
Beta
1.15
1.00
RiskFreeRate
4%
4%
Question#47of169
QuestionID:465844
TheSharpeandTreynorratios,respectively,fortheAMGrowthFundare:
A) 0.44and0.10.
B) 0.40and0.09.
C) 0.08and0.02.
Explanation
Sharperatio=(RRf)/
where:
R=return
Rf=riskfreereturn
=standarddeviation
TheSharperatioisthedifferencebetweentheGrowthFundreturnandtheriskfreeratedividedbytheGrowthFundstandard
deviation[(0.140.04)/0.25=0.40].
Treynormeasure=(RRf)/
where:
R=return
Rf=riskfreereturn
=beta
TheTreynormeasureisthedifferencebetweentheGrowthFundreturnandtheriskfreeratedividedbytheGrowthFund
Beta[(0.140.04)/1.15=0.09].
Question#48of169
QuestionID:465845
IftheAMGrowthFundisconsideredafocused,undiversifiedportfolio,whichmeasurewouldbemoreappropriatein
evaluatingitsrisk/returnperformance?
A) TheSharperatio.
B) TheTreynormeasure.
C) Jensen'sAlphameasure.
Explanation
IftheAMGrowthFundisundiversified,theSharperatiowouldbemoreappropriate.TheSharperatiomeasuresexcessreturn
perunitoftotalrisk,whileTreynormeasuresexcessreturnperunitofsystematicrisk.Forawelldiversifiedportfolio,the
rankingsbetweentheSharpeandTreynormeasureswillbeinsignificantastotalriskandsystematicriskwillbeapproximately
thesame.However,ifaportfolioisnotwelldiversified,theTreynormeasuremayoverstatetheportfolio'srankingbecause
onlysystematicriskisconsidered.Sharpewillconsiderunsystematicrisk,whichwillgivetheundiversifiedportfolioamore
appropriateranking.
Question#49of169
QuestionID:465741
Whichofthefollowingwouldbeleastappropriateinmacroperformanceevaluation?
A) Marketindiceswouldbeusedformanagerstyles.
B) Externalcashflowswouldbeusedtodeterminetheimpactofthesponsor'sdecision
making.
C) Abenchmarkreturniscalculatedasaweightedaverageoftheindividualmanagers'
benchmarkreturns.
Explanation
Broadmarketindiceswouldbeusedforassetcategories.Narrowindiceswouldbeusedformanager'sinvestmentstyles.
Question#50of169
QuestionID:465797
Whichofthefollowingstatementsregardingdiversificationandriskadjustedperformancemeasuresisleastaccurate?
A) Investorswanttheirportfoliomanagerstocompletelydiversifytheirportfolios.
B) Treynor'sperformancemeasureshouldbeusedtoevaluateportfoliosthatwillbeanaddition
toanoveralllargerportfolio.
C) Treynor'sperformancemeasureassumesawelldiversifiedportfolio.
Explanation
Ifaportfoliomanagercompletelydiversifies(i.e.,eliminatesallnonsystematicrisk),thentheappropriaterateofreturnwouldbethatof
themarket.However,whywouldyoupayactivemanagementfeestogetthesamereturnofapassivelymanagedindexproduct?Treynor
usesbetaasitsriskmeasure,whichmeansthatitshouldbeusedinthecontextofadiversifiedportfolio.
Question#51of169
QuestionID:465787
Thefollowingareanumberofcontributionstoreturnforafixedincomeportfolio:
1. Returnoninterestratemanagement
2. Returnontradingactivity
3. Returnduetochangesinforwardrates
4. Returnonthedefaultfreebenchmark
Whichoftheabovestatementsis(are)CORRECT?
EffectofExternal
Contributionofthe
Interest
Management
Environment
Process
A) 3and4
1and2
B) 3
1,2and4
C) 1and3
2and4
Explanation
Changesinforwardratesandthereturnonthedefaultfreebenchmarkareoutsideofthemanager'sinfluenceandare
thereforepartoftheexternalinterestenvironment.Interestratemanagementandtradingactivityareanintegralpartofthe
roleofthemanagerandarethereforepartofthemanagementprocess.Rememberwecouldalsoincludereturnfrom
sector/qualitymanagementandreturnfromtheselectionofspecificsecurities.
Question#52of169
QuestionID:465806
Jensen'salphaforaportfoliomeasuresthe:
A) fund'sreturninexcessoftherequiredrateofreturngiventhesystematicrisk
oftheportfolio.
B) differencebetweenafund'sreturnandthemarketreturn.
C) fund'sreturninexcessoftherequiredrateofreturngiventheunsystematicriskofthe
portfolio.
Explanation
Jensen'salphameasuresthereturnabovetherequiredrateofreturnbasedonthefund'ssystematicrisk.Saiddifferently,
Jensen'salphaistheamountofreturnearnedbythefundoverandabovethereturnpredictedforthefundbasedonthe
capitalassetpricingmodel,giventhefund'ssystematicrisk.
Question#53of169
QuestionID:465868
JackJensenisthepresidentofJensenManagement.Jensenprideshimselfonthecareofhisemployees.Hestatesthatin30
yearsofportfoliomanagement,hehasonlyhadtofiretwoemployees.TomMercerispresidentofAnalyticalInvestors.His
policyhasbeentoreplacepoorlyperformingmanagers,wherepoorperformanceequalsunderperformingtheirbenchmarkfor
twosuccessivequarters.Whichofthefollowingbestdescribesthesemanagers'continuationdecisions?
A) JensenislikelycommittingTypeIerrorandMercerislikelycommittingTypeII
error.
B) JensenislikelycommittingTypeIIerrorandMercerislikelycommittingTypeIerror.
C) JensenisnotlikelytobecommittinganyerrorandMercerislikelycommittingTypeII
error.
Explanation
TypeIerrorisretaining(orhiring)apoorlyperformingmanager.JensenislikelycommittingTypeIerrorbecauseherarely
firesanyone.TypeIIerrorisfiring(ornothiring)asuperiormanager.JensenislikelycommittingTypeIIerrorbecausehe
firesmanagersafteronlytwoquartersofunderperformance.Twoquartersisnotenoughtimetoproperlyevaluateamanager.
Question#54of169
QuestionID:465792
TheSharperatio,Treynormeasure,theM2measureandJensen'sAlphatechniquesallmeasuretherisk/returnperformance
ofportfolios.Whichofthefollowingstatementsaboutthesemeasurementtechniquesisleastaccurate?
A) WhiletheTreynormeasurecomputesexcessreturnperunitofrisk,Jensen's
Alphameasuresdifferentialreturnforagivenlevelofrisk.
B) UsingthecapitalmarketlinetheM2comparestheaccount'sreturntothemarket
returnandisacomparativemeasure.
C) TheSharperatiomeasurestheslopeofthecapitalallocationline(CAL),withthe
lowestslopehavingthemostdesirablerisk/returncombination.
Explanation
AlthoughitistruethattheSharperatiomeasurestheslopeoftheCAL,thehighertheslopethemoredesirabletheportfolio.
YourgoalistoselecttheportfoliothathasthehighestSharpemeasure,whichwillalsohavethesteepestslope.Atanygiven
risklevel,thehighertheslopethegreaterthereturn.
Question#55of169
QuestionID:465732
Whichofthefollowingbestdescribestheimpactofsurvivorshipbiasonusingmanageruniversesasbenchmarks?
A) Fundsponsorswillterminateunderperformingmanagers,underperforming
accountswillnotsurvive,andthemedianwillbebiasedupwards.
B) Asconsistentlyunderperformingfundsareterminatedbythefundsponsors,the
survivingfundsshrinkinnumbersuchthatinafairlyshortperiodoftimethenumber
offundsistoosmalltoallowmeaningfulbenchmarking.
C) Fundsponsorsarereluctanttoterminateunderperformingfunds,theseaccounts
surviveinthebenchmark,andthemedianwillbebiaseddownwards.
Explanation
Theevidenceisclear.Fundsponsorswillrationallyterminateunderperformingmanagers,underperformingaccountswillnot
survive,andthemedianwillbebiasedupwards.Fundsponsorsdemonstratelittleappetiteforunderperformingaccountsand
theyarequicklyremoved.
Question#56of169
QuestionID:465781
Whichofthefollowingstatementsrelatingtoallocation/selectionattributionandfundamentalfactormodelattributionisleast
accurate?
A) Thestrengthofallocation/selectionattributionisthatitdisaggregates
performanceeffectsofmanager'sdecisionsbetweensectorsandsecurities.
B) Thestrengthoffundamentalfactoranalysisisitssimplicityandthereliabilityofthe
correlationsitproduces.
C) Thestrengthofallocation/selectionattributionisthatitisrelativelyeasytocalculate.
Explanation
Akeyweaknessoffundamentalfactormodelattributionisthatitcanprovetobecomplexleadingtothepotentialforspurious
correlations.
Questions#5759of169
Thefollowingdatahasbeencollectedtoappraisetheperformanceoffourassetmanagementfirms:
DixonFund AdamsFund BouldFund WinterburnFund MarketIndex

Return
5.12%
7.68%
8.00%
4.80%
6.4%
Beta
0.95
1.08
1.40
0.80
1.00
Variance
14.05
15.50
20.25
9.20
12.25
Theriskfreerateofreturnis4%.
Question#57of169
QuestionID:465840
UsingtheTreynormeasure,rankthefourfundsintermsoftheriskadjustedexcessreturnsstartingwiththehighest
performingfundandendingwiththelowestperformingfund:
A) Bould,Adams,Dixon,Winterburn.
B) Adams,Bould,Dixon,Winterburn.
C) Adams,Bould,Winterburn,Dixon.
Explanation
Thustherankingis1)Adams2)Bould3)Dixon4)Winterburn.
Question#58of169
QuestionID:465841
UsingtheM2Measure,rankthefourfundsintermsoftheriskadjustedexcessreturnsstartingwiththehighestperforming
fundandendingwiththelowestperformingfund:
A) Adams,Bould,Dixon,Winterburn.
B) Adams,Dixon,Winterburn,Bould.
C) Bould,Adams,Dixon,Winterburn.
Explanation
Question#59of169
QuestionID:465842
UsingtheSharpeMeasure,rankthefourfundsintermsoftheriskadjustedexcessreturnsstartingwiththehighest
performingfundandendingwiththelowestperformingfund:
A) Bould,Adams,Dixon,Winterburn.
B) Adams,Bould,Dixon,Winterburn.
C) Adams,Bould,Winterburn,Dixon.
Explanation
Question#60of169
QuestionID:465796
IfHillusestheSharpemeasureashischosenperformancemeasure,whichportfoliowouldheadd?
A) ManagerC.
B) ManagerB.
C) ManagerA.
Explanation
PortfolioManager Return Beta
Standard
Sharpe
Deviation
A
0.13
0.75
0.06
1.33
0.17
0.85
0.11
1.09
0.08
1.20
0.01
3.00
Question#61of169
QuestionID:465719
WhichofthefollowingwouldNOTberegardedtobeaproblemrelatingtothequalityofdatausedincalculatingratesof
return?
A) Accountvaluationsincludetradedateaccounting.
B) Matrixpricingisusedforsomefixedincomesecurities.
C) Whenaccountscontainilliquidassets,estimatesorguessesareusedinthe
calculation.
Explanation
Theuseoftradedateaccountingwouldberegardedasapositiveattributeoftheaccountinthecontextofmeasuringreturns.
Tradedateaccountingispreferredtosettlementdateandtheinclusionofaccruedinterestanddividendswouldbeideal.
Matrixpricingistheuseofestimatedpricestakenfromquotedpricesonsecuritieswithsimilarcharacteristicsthiscould
clearlyintroduceinaccuraciesinthemeasurementofreturns.
Question#62of169
QuestionID:465727
Whichofthefollowingisleastlikelytobeapropertyofavalidbenchmark?
A) Itispossiblefortheinvestortoreplicatethebenchmark.
B) Theweightsofthesecuritiesinthebenchmarkshouldbebasedonmarketvalues.
C) Thebenchmarkisconsistentwiththemanager'sstyle.
Explanation
Thesecurityweightsinabenchmarkshouldbeclearlyidentifiedbutthereisnostipulationthatavalidbenchmarkhave
securityweightsbasedonmarketvalues.
Question#63of169
QuestionID:465747
BudSeilmanistheportfoliomanagerofawelldiversifiedequityportfolio.Thefollowinginformationisavailableaboutthe
portfolioforthelatestyear.
Weight
Asset
Class
Return
FundBenchmarkFundBenchmark
Largecap 0.50
0.35
14%
15%
Midcap 0.30
0.40
19%
12%
Smallcap 0.20
0.25
8%
18%
Usingportfolioattributionanalysis,whatisthetotaleffectofactivemanagementforSeilman'sportfolio?
A) 0.40%.
B) 0.25%.
C) 0.40%.
Explanation
Totaleffect=RPR,b
RP=(0.514)+(0.3019)+(0.208)=14.30
Rb=(0.3515)+(0.4012)+(0.2518)=14.55
Totaleffect=14.3014.55=0.25%
Question#64of169
QuestionID:465751
Whichofthefollowingstatementsregardingattributionanalysis,benchmarks,andevaluatingportfoliomanagersis
CORRECT?
A) Attributionanalysisforbondsisvirtuallyimpossible.
B) BenchmarkerrorisnonexistentwiththeTreynormeasure.
C) Attributionanalysisseparatesaportfoliomanager'sperformanceintoanallocation
effectandaselectioneffect.
Explanation
Attributionanalysiscanbedonewithbondsasitiswithequities.Theonlydifferenceisthecategoriesofattribution.
BenchmarkerrorisverymuchapartoftheTreynormeasure,asitusesbetaasitsriskmeasure.
Question#65of169
QuestionID:465786
Whichofthefollowingstatementsinrelationtotheeffectoftheexternalinterestenvironmentisleastaccurate?
A) Returnonthedefaultfreebenchmarkassumesnochangeintheforwardrates.
B) Theoveralleffectrepresentstheperformanceofapassive,defaultfreebondportfolio.
C) Thereturnduetotheexternalinterestrateenvironmentisestimatedfromaterm
structureanalysisofAAAratecorporatesecurities.
Explanation
ThereturnduetotheexternalinterestrateenvironmentisestimatedfromatermstructureanalysisofTreasurysecurities.We
aretryingtoestablishthereturnonadefaultfreebondportfolio,thereforetheuseofcorporatesecuritieswouldbe
inappropriate.
Question#66of169
QuestionID:465744
Whichofthefollowingistheleastlikelytobeaninputintomicroperformanceevaluation?
A) Thereturnontheriskfreeasset.
B) Thesectorreturnforthemanager.
C) Theweightofasectorinthebenchmark.
Explanation
Thereturnontheriskfreeassetisnotaninputintomicroperformanceevaluationbutitwouldbeusedasaninputintomacro
performanceevaluation.
Questions#6768of169
ThefollowingdetailsareavailableforthePrimeGrowthFund,S&P500,andU.S.TreasuryBills(Tbills)forthe5yearperiod
from1995to2000.
PrimeGrowth S&P500
Averageannualrateof
return
Standarddeviationof
returns
Beta
12.00%
9.50%
22%
14%
Tbill
3.00%
1.12
Question#67of169
QuestionID:465847
WhatistheSharperatioforthePrimeGrowthFundandfortheS&P500?
A) 0.640.29.
B) 0.410.46.
C) 1.121.00.
Explanation
Sharperatio=Sj=(RjRF)/j
ForthePrimeGrowthFund,theSharperatio=(123)/22=0.41
FortheS&P500,theSharperatio=(9.503.00)/14=0.46
Question#68of169
WhatistheTreynormeasureforthePrimeGrowthFundandtheS&P500?
A) 0.080.07.
QuestionID:465848
B) 8.044.91.
C) 0.640.29.
Explanation
Treynormeasure=T j=(RjRF)/j
ForPrimeGrowthFund,theTreynormeasure=(0.120.03)/1.12=0.0804
FortheS&P500,theTreynormeasure=(0.09500.03)/1=0.0650
Questions#6970of169
ThefollowinginformationisavailablefortheTrumarkFund:
TheTrumarkFundhasanaverageannualreturnof12%overthelastfiveyears.
Trumarkhasabetavalueof1.35.
Trumarkhasastandarddeviationofreturnsof16.80%.
Duringthesametimeperiod,theaverageannualTbillratewas4.5%.
Duringthesametimeperiod,theaverageannualreturnontheS&P500portfoliowas18%.
Question#69of169
QuestionID:465850
WhatistheSharperatiofortheTrumarkFund?
A) 0.80.
B) 5.56.
C) 0.45.
Explanation
SharpeRatio=Sj=(RjRF)/j=(124.50)/16.80=0.45
Question#70of169
QuestionID:465851
WhatistheTreynormeasureforTrumarkFund?
A) 0.06.
B) 0.45.
C) 0.04.
Explanation
Treynormeasure=T j=(RjRF)/j=(0.12.0450)/1.35=0.0556
Question#71of169
QuestionID:465688
Whichofthefollowingformulaswouldrepresentanappropriatecalculationoftherateofreturnearnedbyafundwhenthe
fundreceivesanexternalcashflowatthebeginningofaperiod?
A)
B)
C)
Explanation
Ifanexternalcashflowisreceivedatthebeginningofaperiodthenthemarketvalueatthispointisadjustedtoincludethat
cashflow,itisaddedtotheopeningmarketvalueofthefundanditisaddedtothedenominator.Inthisway,thereturn
measurereflectsthereturnonthefundsundermanagementduringthemeasurementperiod.
Questions#7274of169
FlaminiFundhasthefollowingresultsforamicroattributionanalysis:
Portfolio Benchmark Portfolio

EconomicSectors
Sector
Sector
Sector
Weight(%) Weight(%) Return(%)
BenchmarkSector
Return(%)
Agricultural
5.21
5.08
1.03%
1.02%
CapitalGoods
10.73
11.23
0.87%
0.93%
ConsumerDurables
3.78
4.12
5.24%
5.25%
Energy
20.56
25.79
0.50%
1.56%
Financial
35.43
30.43
3.43%
2.56%
Technology
13.79
16.05
2.78%
4.56%
Utilities
7.80
5.26
2.89%
3.09%
Cashandequivalents
2.70
2.04
0.02%
0.02%
100.00
100.00
1.71%
1.22%
Portfolio
Question#72of169
Usingthedatafromtheabovetable,whatistheperformanceimpactduetothefinancialsectorallocation?
A) 0.0221%.
B) 0.0670%.
C) 0.0435%.
Explanation
RFS=(WP,FSWB,FS)(RB,FSRB)
RFS=(0.3543%0.3043%)(2.56%1.22%)
RFS=(0.05)(1.34%)=0.067%
QuestionID:465770
Question#73of169
QuestionID:465771
Usingthedatafromtheabovetable,whatistheenergywithinsectorallocationreturn?
A) 0.53%.
B) 0.42%.
C) 0.27%.
Explanation
RE=WB,E(RP,ERB,E)
RE=0.2579(0.5%(1.56%))
RE=0.53%
Question#74of169
QuestionID:465772
Usingthedatafromtheabovetable,whatistheallocation/selectioninteractionreturnforTechnology?
A) 0.40%.
B) +0.04%.
C) 0.04%.
Explanation
RT=(WP,TWB,T)(RP,TRB,T)
RT=(0.13790.1605)(2.78%4.56%)
RT=0.04%
Question#75of169
QuestionID:465819
Ifaportfoliohadanalphaof10bps,thentheportfolio:
A) earned10bpslessthanthemarket.
B) earned10bpslessthanthemarketonariskadjustedbasis.
C) hadlessriskthanthemarket.
Explanation
RecallthatJensen'salphameasuresexcessreturnforagivenlevelofrisk.Itisa"riskadjusted"measureofreturn.
Question#76of169
Onelimitationofthetimeweightedreturnisthefactthatit:
A) penalizesmanagersforcashflowsthatoccuroutsideoftheircontrol.
B) requirescomputationseverytimeacashflowoccurs.
C) requiresthecomputationoftheinternalrateofreturneverytimeacashflowoccurs.
QuestionID:465709
Explanation
Thetimeweightedreturncomputationrequirescomputationofreturneverytimeacashflowoccurs.Oneoftheadvantagesof
thetimeweightedreturnisthatpassivebenchmarksusethesamecalculationmethodologywhichmakesitcomparableto
passivebenchmarksandotherportfoliomanagers.
Question#77of169
QuestionID:465760
YouhaveperformedattributionanalysisfortheXVXPortfolioandhavedeterminedthatthesectoreffectwas0.322%,the
withinsectorselectionwas0.157%,andtheallocation/selectioneffectwas0.061%.Thebenchmarkreturnwas8.441%.How
muchwasthemanager'stotalvalueaddedforXVX,andwhatwastheXVXPortfolio'sreturnduringtheperiod?
A) 0.226%,8.667%.
B) 0.418%,8.859%.
C) 0.226%,8.215%.
Explanation
Totalvalueadded=0.322+(0.157)+0.061=0.226%.Portfolioreturn=8.441+0.226=8.667%.
Question#78of169
QuestionID:465863
Whichofthefollowingbestdescribestheuseofqualitycontrolchartsinportfoliomanagement?Qualitycontrolchartsareused
todetermineifamanagerhas:
A) statisticallysignificantexcessreturns.
B) substantialexcessreturns.
C) strayedfromtheirstatedstyle.
Explanation
Inportfoliomanagement,qualitycontrolchartsareusedtodetermineifamanagerhasstatisticallysignificantexcessreturns.
Themanager'sreturnsversusabenchmarkareplottedonagraphwheretimeisonthexaxisandvalueadded(excess)
returnisplottedontheyaxis.Aconfidenceintervalisformedaroundthexaxisofzero.Ifthemanager'sreturnsplotoutside
theconfidenceinterval,weconcludethatthemanagerhasgeneratedstatisticallysignificantexcessreturns.
Question#79of169
QuestionID:465804
period.
EquityFundS&P500
Return32%26%
Beta0.981.00
Riskfreerateis6.00%
ThedifferencebetweentheSharperatiofortheequityfundandtheSharperatiofortheS&P500isthe:
A) equityfundis0.06lower.
B) S&P500is0.04lower.
C) S&P500is0.09higher.
Explanation
TheequityfundSharperatio:(0.320.06)/0.41=0.63
TheS&P500Sharperatio:(0.260.06)/0.29=0.69
Theequityfundis(0.630.69)=0.06lower
Question#80of169
QuestionID:465748
Theresultsofamacroperformanceattributionanalysisofafundislistedbelow.
FundValue
Beginningvalue
$100,000
Netcontributions
100,000
Riskfreeasset
101,000
Assetcategory
108,000
Benchmarks
109,000
Investment
110,000
strategies
Allocationeffects
112,000
Hadthemanageronlyengagedinapureindexapproach,insteadof12%,thereturnofthefundwouldhavebeen:
A) 9%.
B) 8%.
C) 10%.
Explanation
Return=8%=($108,000$100,000)/$100,000.
TheAssetCategoryinvestmentstrategyassumesthattheFund'sbeginningvalueandexternalcashflowsareinvested
passivelyinacombinationofthedesignatedassetcategorybenchmarks,withthespecificallocationtoeachbenchmarkbased
onthefundsponsor'spolicyallocationtothoseassetcategories.Inessence,thisapproachisapureindexfundapproach.
Theassetcategorycorrespondstoapureindexapproach.Thedollarreturnwouldhavebeen$8,000or8%ontheinitial
$100,000.
Question#81of169
QuestionID:465763
Valueaddedreturnisdefinedasthe:
A) portfolioreturninexcessofthereturnpredictedbasedontheCapitalAsset
PricingModel.
B) fundreturnminustheriskfreerateofreturn.
C) portfolioreturnminusthebenchmarkreturn.
Explanation
Valueaddedreturn=PortfolioreturnBenchmarkreturn
Question#82of169
QuestionID:465764
Whichofthefollowingareexamplesofanassetallocationstrategyusedbyaportfoliomanager?
A) Selectingassetswithinamarketsegmentthatwilloutperformtheassetscontained
withinthecorrespondingbenchmarkindex.
B) Bothmarkettimingandsectorrotation.
C) Sectorrotation.
Explanation
Bothmarkettimingandsectorrotationareexamplesofassetallocationstrategies.
Question#83of169
QuestionID:465725
Whichofthefollowingstatementsaboutstyleindexesisleastaccurate?
A) Theyhelpfundsponsorsbetterunderstandamanager'sinvestmentstyle,by
capturingfactorexposures.
B) Theyarewidelyavailable,widelyunderstoodandwidelyaccepted.
C) Somestyleindexescancontainweightingsincertainsecuritiesand/orsectorsthat
maybelargerthanconsideredprudent.
Explanation
Helpingfundsponsorsbetterunderstandamanager'sinvestmentstyle,bycapturingfactorexposuresisanadvantageof
factormodelsandnotstyleindexes.Theotherstatementsaretrueinthecontextofstyleindexes.
Question#84of169
QuestionID:465759
RobertBrownisintheprocessofdecomposingthevarioussourcesofreturntohisbondportfoliothatyieldedareturnof10%.
Theactualtreasuryyieldwas8%,whichis0.5%betterthantheexpectedyieldof7.5%.Inaddition,Brownhasascertained
thathisportfoliobenefitedby0.50%duetosectorallocationand0.25%fromallocation/selectioninteraction.Basedonthis
information,howmuchoftheportfolio'soverallreturnisattributabletowithinsectorselection?
A) 1.25%.
B) 1.00%.
C) 1.75%.
Explanation
Expectedtreasuryyield
=7.50%
Unexpectedtreasuryyield
=0.50%
Returnfromsectorallocation
=0.50%
Returnfromallocation/selectioninteraction =0.25%
Returnattributabletowithinsectorselection =1.25%
(canbebackedoutgiventheotherinformation)
Totalreturn
=10.0%
Question#85of169
QuestionID:465691
TheCampbellaccountis$5,000,000atthebeginningofJanuaryand$5,200,000attheendofthemonth.Duringthemontha
contributionof$60,000wasreceived.Whatwouldbetherateofreturnontheaccountifthecontributionwasreceivedon
January1,whatwoulditbeifthecontributionwasreceivedonJanuary31?
January1
January31
A) 4.00%
2.80%
B) 2.77%
4.00%
C) 2.77%
2.80%
Explanation
Ifthereceiptwasatthebeginningoftheperiodthen:
Ifthereceiptwasattheendoftheperiodthen:
Question#86of169
QuestionID:465721
Giventhefollowingdata,howisthemanager'sperformancemostaccuratelycharacterized?
Manager'sReturn
5.2%
BenchmarkReturn
6.3%
MarketIndexReturn
4.3%
A) Themanagerearnedanexcessreturnfromstyleandactivemanagement.
B) Themanagerearnedanexcessreturnfromactivemanagementbutnotfromstyle.
C) Themanagerearnedanexcessreturnfromstylebutnotfromactivemanagement.
Explanation
Themanagerearnedareturnfromstyle,wherethestylereturnisthebenchmarkreturnminusthemarketreturn(6.30%
4.30%=2.00%).Themanagerdidnotearnareturnfromactivemanagement,wheretheactivereturnisthemanager'sreturn
minusthebenchmarkreturn(5.20%6.30%=1.10%).
Question#87of169
QuestionID:465802
Theratioofreturntosystematicriskforaninvestmentportfoliois0.70,whilethemarketis0.50.Thisinformationsuggeststhatthe
portfolio:
A) exhibitssuperiorperformancebecausethereturnperunitofriskisabovethatofthe
market.
B) isnotdiversifiedenough,andmoresecuritiesshouldbepurchasedtobringtheportfolioinline
withthemarket.
C) exhibitsinferiorperformancebecauseithasmoreriskthanthemarket.
Explanation
Riskaverseinvestorspreferaportfoliowithahigherratioofreturntosystematicrisktoaportfoliowithalowerratio.Inthis
case,wecanalsosaythattheportfoliowouldplotabovetheSMLsincetheportfolio'sratioisabovethatofthemarket.Since
portfoliosthatplotabovetheSMLareundervalued,theyarelikelytoprovideanaboveaveragereturn.Note:Theratio
(Treynor'sMeasure)implicitlyassumesadiversifiedportfolio,hencetheuseofbeta(orsystematicrisk)inthedenominator.
Question#88of169
QuestionID:465684
JuneSpraker,CFA,managesaportfolioforaprivatefamily.Intherecentupdateoftheinvestmentpolicystatement(IPS),the
familyhasaskedSprakertoincreasethesophisticationofherportfolioperformanceevaluationtogiveanexhaustive
assessmentoftheriskstowhichtheportfolioisexposed.Thefamilyinsistsonincludingthedetailsoftheevaluationprocessin
theIPS.Theirrequestis:
A) notjustifiedbecauseportfolioperformanceevaluationshouldnotbe
addressedintheIPS.
B) justifiedbecausethisiswhatthelawrequires,buttheusefulnessoftherequestisnot
clear.
C) justifiedbecausethereareawidevarietyofwaysinvestmentreturnscanbeearned
withmanytypesofriskexposures,andthedetailsoftheprocessshouldbeintheIPS.
Explanation
Understandinghowareturnwasearnedisveryimportantsothatthemanagercanknowifthefundhadthecorrectexposures
asspecifiedintheIPS.
Question#89of169
QuestionID:465734
Whichofthefollowingbestcharacterizesmanageruniversesasabenchmark?Manageruniverses:
A) arenotavalidbenchmarkbecausetheyarenotmeasurable.
B) areavalidbenchmarkbecausetheyaremeasurable.
C) arenotavalidbenchmarkbecausetheyarenotinvestable.
Explanation
Manageruniversesarenotavalidbenchmarkbecausetheyarenotinvestable,arenotspecifiedinadvance,andarenot
unambiguous.Itisalsoimpossibletodetermineiftheyareappropriateduetotheambiguityofthemedianmanager.
Furthermore,theperformancerecordsofpoormanagersaredroppedfrommanageruniversessothereisanupwardbias
(i.e.,survivorshipbias)wherethemedianmanager'sreturnisinflated.Theonlypropertyofavalidbenchmarkthatmanager
universesfulfillisthattheyaremeasurable.
Questions#9091of169
BudSeilmanistheportfoliomanagerofawelldiversifiedequityportfolio.Thefollowinginformationisavailableaboutthe
portfolioforthelatestyear.
Weight
Asset
Return
FundBenchmarkFundBenchmark
Class
Large 0.50
0.40
14%
15%
0.35
19%
12%
0.25
8%
18%
cap
Midcap 0.30
Small
0.20
cap
Question#90of169
Usingportfolioattributionanalysis,whatisthesectorallocationeffectforSeilman'sportfolio?
A) 0.03%.
B) 0.4%.
C) 0.0%.
QuestionID:465767
Explanation
Rb=(0.415)+(0.3512)+(0.2518)=14.70%
SectorEffect={(WpiWbi)(RbiRb)}
OrSectoreffect=[((0.500.40)(1514.7))+((0.300.35)(1214.7))+((0.200.25)(1814.7))]=[0.03+0.1350.165]
=0.0%
Question#91of169
QuestionID:465768
Usingportfolioattributionanalysis,whatisthewithinsectorselectioneffectforSeilman'sportfolio?
A) 0%.
B) 0.45%.
C) 0.03%.
Explanation
WithinsectorselectionEffect=[(WBj(RPjRBj)]
Withinsectorselectioneffect=[(0.40(1415))+(0.35(1912))+(0.25(818))]=0.45%
Question#92of169
QuestionID:465746
FrankBusbyisontheboardforapensionfundandwouldliketoevaluatethefund'sperformanceanddetermineitssources
ofreturn.WhichofthefollowingisBusbymostlikelytoutilize?
A) Microperformanceevaluation.
B) Performancedecompositionanalysis.
C) Macroperformanceevaluation.
Explanation
Macroperformanceevaluationisperformedatthefundsponsorlevel.Itdecomposesfundperformanceintothatfromnet
contributions,theriskfreeasset,assetcategories,benchmarks,investmentmanagers,andallocationeffects.
Questions#9398of169
KelliBlakelyisaportfoliomanagerfortheMirandaFund(Miranda),acorelargecapequityfund.Themarketproxyand
benchmarkforperformancemeasurementpurposesistheS&P500.AlthoughtheMirandaportfoliogenerallymirrorsthe
assetclassandsectorweightingsoftheS&P,Blakelyisallowedasignificantamountofleewayinmanagingthefund.Her
portfolioholdsonlystocksfoundintheS&P500andcash.
Blakelywasabletoproduceexceptionalreturnslastyear(asoutlinedinTableAbelow)throughhermarkettimingand
securityselectionskills.Attheoutsetoftheyear,shebecameextremelyconcernedthatthecombinationofaweakeconomy
andgeopoliticaluncertaintieswouldnegativelyimpactthemarket.Takingaboldstep,shechangedhermarketallocation.For
theentireyearherassetclassexposuresaveraged50%instocksand50%incash.TheS&P'sallocationbetweenstocksand
cashduringperiodwasaconstant97%and3%,respectively.Theriskfreerateofcashreturnswas2%.
Table1OneYearTrailingReturns:MirandaFundvs.S&P500
MirandaFund S&P500
Return
Standard
10.2%
22.5%
37%
44%
1.10
1.00
Deviation
Beta
Question#93of169
QuestionID:465826
WhataretheSharperatiosfortheMirandaFundandtheS&P500?
MirandaFund S&P500
A) 0.3515
0.2227
B) 0.2216
0.5568
C) 0.0745
0.2450
Explanation
TocalculatetheSharperatio,usethefollowingformula:
Sharperatio=(RRf)/
where:
R=return
Rf=riskfreereturn
=standarddeviation
TheSharperatiofortheMirandaFundis:
(0.1020.02)/0.37=0.2216
TheSharperatiofortheS&P500is:
(0.2250.02)/0.44=0.5568
BasedontheSharperatio,BlakelyoutperformedtheS&P500onariskadjustedbasis(whenriskisdefinedastotalrisk).The
Sharperatioisbestforportfolioswithlargeamountsofunsystematicrisk.(StudySession17,LOS34.p)
Question#94of169
WhatistheTreynormeasurefortheMirandaFundandtheS&P500?
MirandaFund S&P500
A) 0.2216
0.5568
QuestionID:465827
B) 0.1109
0.2050
C) 0.0745
0.2450
Explanation
TocalculatetheTreynormeasure,usethefollowingformula:
Treynormeasure=(RRf)/b
where:
R=return
Rf=riskfreereturn
b=beta
TheTreynormeasurefortheMirandaFundis:
(0.1020.02)/1.10=0.0745
TheTreynormeasurefortheS&P500is:
(0.2250.02)/1.00=0.2450
BasedontheTreynormeasure,BlakelyoutperformedtheS&P500onariskadjustedbasis(whenriskisdefinedas
systematicrisk).TheTreynorratioismeaningfulforportfoliosthatarewelldiversified.(StudySession17,LOS34.p)
Question#95of169
WhatistheJensenmeasurefortheMirandaFund?
A) 0.3270.
B) 0.0745.
C) 0.3515.
Explanation
TocalculatetheJensenmeasure,usethefollowingformula:
Jensen'salpha=Ra[Rf+b(RmRf)]
where:
Ra=returnonactualportfolio
Rf=riskfreereturn
Rm=marketreturn
b=betaofportfolio
TheJensenmeasureforMirandaFundis:
0.102[0.02+1.10(0.2250.02)]=0.3515
QuestionID:465828
Jensen'sAlphameasurestheexcessreturnforagivenlevelofsystematicrisk.Italsomeasuresthevalueaddedofanactive
strategy.Jensen'sAlphaindicatesthattheexcessreturnfortheMirandaFundwas35.15percentagepointsmorethanthe
returnimpliedbytheCAPM/SecurityMarketLine.BecauseJensen'sAlphashouldbeusedtocomparewelldiversified
portfolioshavingthesamebetas,itwouldnotbethebestmeasureforassessingthevalueaddedbyBlakely.(StudySession
17,LOS34.p)
Question#96of169
QuestionID:465829
Whataretheoneyearassetclassreturns(stocks,cash)forMirandaandthebenchmark?
MirandaFund(stocks,
cash)
S&P500(stocks,cash)
A) 18.4%,2%
23.26%,2%
B) 22.4%,2%
23.13%,2%
C) 18.4%,2%
23.10%,3%
Explanation
TocalculatetheoverallactualreturnsfortheMirandaFundandthebenchmarkreturnsforS&P500,usethefollowing
formula:
Totalreturn=(WiRi)
where:
Wi=weightsofeachindividualassetclass
Ri=returnsofeachindividualassetclass
Blakelydecidedtoaltertheassetallocationweightsto50%stocksand50%cash.SincetheactualtotalreturnfortheMiranda
Fundwas10.2%andthecashreturnwas2%,thentheassetclassreturnforstocksis:
0.102=[(0.50Ri)+(0.500.02)]
0.0920=0.50Ri
Ri=0.1840=18.4%
ThereforefortheMirandaFund,theassetclassreturnsforstocksandcashare18.4%and2%respectively.
ThebenchmarkS&P500hadconstantweightsof97%stocksand3%cash.SincetheactualtotalreturnfortheS&P500was
22.5%andthecashreturnwas2%,thentheassetclassreturnforstocksis:
0.225=[(0.97Ri)+(0.030.02)]
0.2256=0.97Ri
RI=0.2326=23.26%
Therefore,fortheS&P500,theassetclassreturnsforstocksandcashare23.26%and2%respectively.
(StudySession8,LOS19.n)
Question#97of169
QuestionID:465830
WhatwastheeffectofBlakely'sactivemanagementdecisionontheMirandaFund'soneyearperformance?
A) 20.83%.
B) 32.70%.
C) 11.87%.
Explanation
Activemanagementdecisionsareassumedtogeneratethedifferencebetweentheportfolioandbenchmarkreturns.
A=PB
where:
A=Activemanagementdecision
P=theinvestmentmanager'sportfolioreturn
B=thebenchmarkreturn
A=10.2%&8722(22.5%)=+32.7%.
(StudySession17,LOS34.e)
Question#98of169
QuestionID:465831
WhatwastheeffectofBlakely'swithinsectorselectionabilityontheMirandaFund'soneyearperformance?
A) 40.41%.
B) 11.87%.
C) 22.83%.
Explanation
Tocalculatethewithinsectorselectioneffect,usetheformulabelow:
withinsectorselectioneffect=[(wBj)(RPjRBj)]
where:
wBj=investmentweightgiventotheassetclassinthebenchmarkportfolio
RPj,RBj=investmentreturntotheassetclassinthemanager'sactualportfolioandthebenchmarkportfolio,
respectively
withinsectorselectioneffect=[0.97(0.184(0.2326)]+[0.03(0.020.02)]=0.4041=40.41%
Blakelygainedanadditional40.41%byselectingsecuritiesthatweresuperiortothesecuritieswithinthebenchmark.This
higherreturnwasattributabletoherstockselectionskillsinpickingspecificstocksthatoutperformedthemarketbenchmark.
Thisenabledhertocaptureexcessreturns(alpha)inexcessoftheS&P500benchmark.(StudySession17,LOS34.l)
Question#99of169
QuestionID:465809
AnanalysthasgatheredthefollowinginformationabouttheperformanceofanequityfundandtheS&P500indexoverthe
sametimeperiod.UsingJensen'sAlphatomeasuretherisk/returnperformanceoftheEquityfundandtheS&P500,whichof
thefollowingconclusionsisCORRECT?
Equity
Fund
S&P500
Return
23%
27%
StandardDeviation
15%
19%
Beta
1.09
1.00
Riskfreerateis3.50%
A) TheS&P500underperformedtheequityfundby2.67%.
B) TheS&P500outperformedtheequityfundby3.24%.
C) TheequityfundunderperformedtheS&P500by6.12%.
Explanation
Jensen'sAlpha:0.23[0.035+(0.270.035)1.09]=0.0612or6.12%.ThenegativemeansitunderperformedtheS&P500.
Question#100of169
QuestionID:465740
TheSharperatiohasbecomeacommonlyusedperformancemeasureforhedgefunds.Whichofthefollowingstatementsin
relationshiptotheuseoftheSharperatiointheassessmentofhedgefundperformanceisleastaccurate?
A) Ahedgefund'sSharperatiocanbecomparedtothatofauniverseofsimilar
hedgefunds.
B) Theuseofderivativespositionsinahedgefundremovesmostoftheskewnessin
returnsmakingtheuseofstandarddeviationsappropriate.
C) TheSharperatioistheexcessreturnstothevolatilityencounteredinearningthem.
Explanation
Itisclearthatforasignificantnumberofhedgefundsreturnsdemonstrateasignificantdegreeofskewnessoftencreatedby
theuseofderivativepositions.Theotherstatementsarecorrect.
Question#101of169
QuestionID:465693
TomStovallisaportfoliomanagerwhotrackstheWilshire5000Index.Hereceivedalargecashinflowfromaclientpriortoa
bullmarket.Whichofthefollowingmostaccuratelycharacterizestherelationshipforthetimeweightedreturnandthemoney
weightedreturnforTom?Thetimeweightedreturnwillbe:
A) unaffectedbythetimingofthecashinflowandthetimeweightedreturnwillbe
smallerthanthemoneyweightedreturn.
B) inflatedbythetimingofthecashinflowandthetimeweightedreturnwillbelarger
thanthemoneyweightedreturn.
C) unaffectedbythetimingofthecashinflowandthetimeweightedreturnwillbelarger
thanthemoneyweightedreturn.
Explanation
Ifamanagerreceivesalargecashinflowfromaclientpriortoabullmarket,themoneyweightedreturnwillbehigherthanthe
timeweightedreturn.Thetimeweightedreturnwillbeunaffectedbythetimingofthecashinflow.
Question#102of169
QuestionID:465817
ThefollowingdetailsareavailableforthePrimeGrowthFund,theS&P500(market),andtheU.S.Tbillrate(riskfreerate)for
the5yearperiodfrom1995to2000.
PrimeGrowth S&P500
Averageannualrateof
return
Standarddeviationof
returns
12.00%
9.50%
22%
14%
Beta
1.12
Sharperatio
0.41
0.46
Treynormeasure
.080
.065
Jensensalpha
0.017
R2
0.29
Tbill
3.00%
Basedontheresults,wecanconcludethatthePrimeGrowthFund:
A) containsvirtuallynounsystematicrisk.
B) seemstohaveunderperformedthemarketbasedontotalriskbasisbutout
performedthemarketbasedonasystematicriskadjustedbasis.
C) outperformedthemarketonatotalriskadjustedbasis.
Explanation
TheSharperatioforthePrimeGrowthFundislowerthantheS&P500,hencethefundhasunderperformedthemarketona
totalriskadjustedbasis.TheJensen'salphaispositiveandtheTreynormeasureishigherforthePrimeGrowthFundas
comparedtotheS&P500.Hence,PrimeGrowthoutperformedthemarketonasystematicriskadjustedbasis.Also,notethat
thefundhasalowR2value,meaningthatthefundisnotverywelldiversifiedandlikelycontainsasignificantamountof
unsystematicrisk.
Question#103of169
QuestionID:465750
Inusingmicroattributionanalysistobreakdowntheperformanceofthemanagerofafund,theanalystfindsthefollowingfor
aparticularassetclass:
PortfolioWeight
9%
SectorBenchmarkWeight
7%
SectorPortfolioReturn
4%
SectorBenchmarkReturn
3%
BenchmarkReturn
0.2%
Baseduponthesenumbers,thewithinsectorselectionreturnwouldbe:
A) 0.070%.
B) 0.056%.
C) 0.020%.
Explanation
Themicroattributionbreakdownisbelow:
Puresectorallocationreturn:
=[0.090.07][.030.002]
=0.056%
Withinsectorselectionreturn:
=0.07[.04.03]
=0.07%
Allocation/selectioninteractionreturn:
=[0.090.07][.04.03]
=0.02%
Question#104of169
QuestionID:465726
Oneofthepropertiesofavalidbenchmarkisthatitbereflectiveofcurrentinvestmentopinion.Whichofthefollowingisthe
mostaccurateexplanationofthisproperty?
A) Themanagershouldhaveknowledgeofthesecuritiesinthebenchmark.
B) Themanagershouldaccepttheapplicabilityofthebenchmark.
C) Thesecuritiesinthebenchmarkshouldbethosefavoredbyamajorityofanalysts.
Explanation
Thepropertythatabenchmarkshouldbereflectiveofcurrentinvestmentopinionreferstothefactthatthemanagershould
haveknowledgeandexpertiseofthesecuritiesinthebenchmark.Thatthemanagershouldaccepttheapplicabilityofthe
benchmarkreferstotheaccountablepropertyofavalidbenchmark.
Questions#105110of169
BillCarter,CFAandBobWalters,CFAareanalyzingtherecentreturnofseveralfundstheyhavebeenassignedtomanage.
ThefundsareFundA,FundB,FundC,andFundDasindicatedinthetablebelow.
Return
Beta
FundA
FundB
FundC
FundD
Market
7.80%
7.20%
8.20%
7.60%
7.00%
1.10
0.90
1.20
1.05
1.00
ReturnStd.Dev.
4.00%
3.44%
4.15%
3.50%
TrackingError*
0.82%
0.45%
1.02%
0.67%
3.55%
*TrackingerroristhestandarddeviationofthedifferencebetweentheFundReturnandtheMarketIndexReturn
Theriskfreerateofreturnfortherelevantperiodwas3.5%.
ThemanagementofthefirmthatCarterandWaltersworksforisveryproudofthefactthatallofthefourfundshadahigher
returnthantheoverallmarketasindicatedonthetable.Thefirm'smanagementwantstoadvertisehow,usingthemarketasa
benchmark,thesefundshavehadreturnshigherthanthatbenchmark.Thefirm'smanagementasksCarterandWaltersto
computeseveralperformancemeasuressuchastheTreynormeasure,theSharperatio,andtheM2measure.Thefirm's
managementalsoasksfortheconstructionofqualitycontrolcharts.
Ingoingovertheresults,Carterisskepticaloftheresultsandusingthemarketasabenchmarkbecausethatbenchmarkwas
notspecifiedinadvance.Walterssaysthatheisskepticaltoobecauseitisnotclearifthemarketisanappropriatebenchmark
inallcases.Theywanttoproceedcautiouslybecausethefirm'smanagementrecentlyinstitutedpoliciesformanager
continuation.Foreachmanager,thefirm'smanagementhassetupthenullhypothesisthatamanagerhasnoskillandthe
alternativehypothesisisthatthemanagerhasskillinaddingvalue.
CarterandWaltersdiscussconstructingacustombenchmarkforsomeoftheseorotherfundstheymightmanage.Afewof
thesefundsholdcashpositionstotakeadvantageofgoodinvestmentopportunitieswhentheyarise.Cartersaysthatthe
benchmarktheyconstructshouldincludecashintheweightingscheme.Theysetasideafewweekstoconstructapreliminary
benchmarkforseveralfunds.Walterswantstobethorough,becauseoncetheyconstructthebenchmark,hedoesn'tplanto
makeanymodificationstothecustombenchmark.
Question#105of169
QuestionID:465833
TheportfoliowiththehighestSharperatiois:
A) FundC.
B) FundD.
C) FundA.
Explanation
TheformulafortheSharperatiois:
ForfundsA,B,C,andD,therespectiveSharperatiosare1.075,1.076,1.134,and1.171.FundDisthehighestcalculatedas:
(7.63.5)/3.5=4.1/3.5=1.171.(StudySession17,LOS34.j,p)
Question#106of169
WhatistheM2measureforfundD?
QuestionID:465834
A) 6.76%.
B) 11.26%.
C) 7.66%.
Explanation
TheformulafortheM2measureis:
M2PortfolioD=7.659%=3.5%+(7.6%3.5%)(3.55%/3.5%).
(StudySession17,LOS34.p)
Question#107of169
QuestionID:465835
Ifthereturnsofeachfundwereplottedoveraqualitycontrolchartusingthemarketasabenchmark,thefinalpointofthe
valueaddedlinewouldbeabovezero,i.e.,abovethehorizontalaxisfor:
A) allofthefundsexceptConly.
B) noneofthefunds.
C) allofthefunds.
Explanation
Sinceallofthefunds'returnsarehigherthanthebenchmarkfortheperiod,allofthefundswouldhaveapositiveendpointfor
thecumulativevalueaddedline.(StudySession17,LOS34.r)
Question#108of169
QuestionID:465836
WithrespecttothereasonsforCarterandWaltersbeingskepticalofusingthemarketasabenchmark:
A) bothCarterandWaltersarecorrect.
B) CarteriswrongandWaltersiscorrect.
C) bothCarterandWaltersarewrong.
Explanation
Theirobjectionsarebothjustified.Abenchmarkshouldbespecifiedinadvanceanddeemedappropriateforthestyleofthe
fund.(StudySession17,LOS34.j)
Question#109of169
QuestionID:465837
WithrespecttotheconsiderationsthatCarterandWaltersputintopreparingacustombenchmark,includingaweightingfor
cashandnotmakingmodifications:
A) CarterandWaltersarebothcorrect.
B) CarteriswrongandWaltersiscorrect.
C) CarteriscorrectandWaltersiswrong.
Explanation
Carteriscorrectinthatacustombenchmarkshouldincludeanappropriateweightforcashholdings.Waltersiswronginthata
benchmarkshouldbemodifiedonapresetschedule.(StudySession17,LOS34.l)
Question#110of169
QuestionID:465838
ThefirmthatCarterandWaltersworkforhavesetupanullhypothesisforeachmanager.Insuchacase,thefirmwould
makeatypeIIerrorifit:
A) firesaskilledmanager.
B) keepsanunskilledmanager.
C) hiresasecondmanagertohelpadoubtfulmanager.
Explanation
Inthiscase,weassumeamanagerdoesnotaddvalueandtrytogatherinformationthatthemanagerdoes.Withoutsufficient
evidencetoprovevalueisadded,themanagerwouldbefired.Randomnoisecouldleadtothisconclusioneventhoughthe
managerdoesaddvalue.(StudySession17,LOS34.t)
Question#111of169
QuestionID:465762
Whatisthetotalvalueadded?
A) 32.70%.
B) 34.70%.
C) 21.26%.
Explanation
totalvalueadded=overallactualfundreturnoverallbenchmarkreturns
=10.2(22.5)=32.70%
Blakely'sMirandaFundwasabletooutperformtheS&P500indexby32.7%.
Question#112of169
WhichofthefollowingwouldNOTbeafeatureofawellformulatedmanagercontinuationpolicy?
A) Underperformance,inanycircumstances,willleadtoautomaticreplacementof
themanager.
B) Decisionstoreplacemanagersshouldalwaysbetakenonaclearcostbenefit
analysisbasis.
QuestionID:465865
C) Aformalized,writtenmanagercontinuationpolicyincludinggoalsandguidelines.
Explanation
Shortperiodsofunderperformanceshouldnotnecessarilyleadtoautomaticreplacementofthemanager.Underperformance
forconsecutivereviewperiodsshouldputtheplansponsoronnoticeofapotentialproblem.
MaryJohnsonandJaneMeinrodareanalystswithAlphaSystems.Alphaprovidesconsultingservicestoportfoliomanagers,
mutualfunds,anddefinedbenefitpensionplans.Alpha'smainserviceisperformancemeasurementandattribution.Alphahas
providedthisservicetomanagersworldwideformorethanelevenyears.
JohnsonandMeinrodarediscussingtheperformanceofFrankWeinstein.Weinsteinisaportfoliomanagerwhocatersto
wealthyclientsinthesuburbsofAtlanta.Manyofhisclientsarequiteanxiousovertherecentdownturninthestockmarket
andhavebeensellingstocksasthemarkethasdeclined.Conversely,asmallminorityofclientshavebeenbuyingonthedips
inthemarket,therebyincreasingtheirexposuretostocksasthemarkethasdeclined.ManyofWeinstein'sclientsarequite
wealthyandhaveovertenmilliondollarsentrustedtohim.Weinsteinwouldlikehisclientstopursueamorelongtermtrading
strategytoreducetransactionscosts.However,becauseoftheirsubstantialwealth,hedoesnotfeelthathecanobjecttoo
stronglytotheirdemandsforshorttermtrading.JohnsonstatesthatWeinstein'sperformanceshouldbeevaluatedusinga
moneyweightedreturnasthiswouldbethebestgaugeofhisperformance.Meinrodrepliesthattheuseofthemoney
weightedreturnwouldbelessexpensivethanusingatimeweightedreturn.
WeinsteinwouldlikeJohnsonandMeinrodtoevaluatetheperformanceofoneofhislargestclients,ThomasFranklin.The
recordsfortheFranklinportfolioshowthefollowing:onAugust1,theportfoliowasvaluedat$18,600,000,andonAugust16,
Franklincontributed$5,000,000totheportfolio.Afterthatcontribution,theportfoliowasvaluedat$26,200,000.OnAugust31,
theaccountwasvaluedat$19,400,000.Johnsonreportsthatthisaccountcontainsquiteafewfixedincomesecuritiesand
thatthiswillincreasethedifficultyinvaluingthisaccount.Meinrodstatesthata"nexus"approachcanbeusedtodealwithany
difficultiesencounteredinvaluingfixedincomesecurities.
JohnsonandMeinrodarealsoevaluatingtheperformanceofCutterMutualFund.Cutterspecializesininvestinginsmallcap
stocksfromvariousmarketsinthePacificbasin.BecausefundswithaninvestmentobjectivelikeCutter'saresomewhat
uncommon,Cuterhashaddifficultyconstructingavalidbenchmark.Whilediscussingthepropertiesofavalidbenchmark,
Johnsonassertsthatabenchmarkshouldbeinvestable,referringtotheabilityofthemanagertoreplicatethesecuritiesinthe
benchmark.Meinrodrespondsthatabenchmarkshouldalsoreflectcurrentinvestmentopinion,bywhichshemeansthatthe
benchmarkshouldbeinvestedinsecuritiesthatmostmanagerswouldagreeareattractivepurchases.
HavingsettledonavalidbenchmarkfortheCutterFund,JohnsonandMeinrodgatherthefollowingperformancestatisticsfor
thefund,thebenchmark,andamarketindex:
Cutterportfolio
return
4.90%
Benchmarkreturn 5.20%
Marketindex
return
Question#113of169
4.10%
QuestionID:485150
Regardingtheanalysts'statementsconcerningtheuseofthemoneyweightedreturnandthetimeweightedreturnfor
Weinsteinportfolio:
A) bothanalystsarecorrect.
B) bothanalystsareincorrect.
C) Johnsonisincorrect,andMeinrodiscorrect.
Explanation
Johnsonisincorrect.ThediscussionindicatesthatWeinstein'sclientscontrolthecashinflowsandtheoutflowsfortheir
portfolios,andtheuseofamoneyweightedreturnwouldresultinanunfairevaluationofWeinstein.Atimeweightedreturn
shouldbeusedhere.Meinrodiscorrect.Themoneyweightedreturnislessexpensivetoadministerthanthetimeweighted
returnbecausethetimeweightedreturnwillrequiremorefrequentvaluationsoftheportfolio.(StudySession17,LOS32.c)
Question#114of169
QuestionID:485151
WhatarethetimeweightedandmoneyweightedreturnsfortheFranklinaccountduringAugust(assumingcompounding
everyhalfmonth)?
A) Thetimeweightedreturnis15.6%andmoneyweightedreturnis19.8%.
B) Thetimeweightedreturnis4.3%andmoneyweightedreturnis4.3%.
C) Thetimeweightedreturnis17.8%andmoneyweightedreturnis15.5%.
Explanation
Thetimeweightedreturnis15.6%andmoneyweightedreturnis19.8%.
Tocalculatethetimeweightedreturn,firstcalculatethereturnsforeachperiod:
Subperiod1(Days116)
Subperiod2(Days1731)
Compoundingthereturnstogethertocalculateamonthlytimeweightedrateofreturn:
=(1+0.1398)(10.2595)1=0.156=15.6%.
Toobtainthemoneyweightedreturn,wecanuseourfinancialcalculator.Weassumethatcompoundingoccurseveryone
halfmonthbecausethecashflowcomesexactlyinthemiddleofthemonth.UsingtheIRRfunctionontheTIBAIIPlus:
MV1=MV0(1+R)2+CF 1(1+R)
$19,400,000=$18,600,000(1+R)2 +$5,000,000(1+R)
R=10.43%
KeystrokesontheTIBAIIPlus:
CF2ndCLRWORK
CF(0)18,600,000ENTER
CF(1)5,000,000ENTER
CF(2)19,400,000ENTER
IRRCPT=10.43
Toconvertthishalfmonthreturntoamonthlyreturn,wecompounditovertwoperiods:
MWR=(10.1043)21=0.1978=19.8%.
(StudySession17,LOS32.c)
Question#115of169
QuestionID:485152
ConcerningthevaluationoftheFranklinaccount,JohnsonandMeinrodwere:
Johnson
Meinrod
A) Correct
Incorrect
B) Incorrect
Incorrect
C) Correct
Correct
Explanation
Johnsoniscorrect.Fixedincomesecuritiestendtobelessliquidandthiswillmaketheaccountmoredifficulttovalueona
periodicbasis.Meinrodisincorrect.Theapproachusedtodealwiththeilliquidityofsecuritiesis"matrixpricing."Inmatrix
pricing,thepricesavailableforsimilarfixedincomesecuritiesaresubstitutedforthepricesofbondsintheportfolio.(Study
Session17,LOS32.c)
Question#116of169
QuestionID:465714
ThestatementsJohnsonandMeinrodmadeconcerningtheuseofavalidbenchmarkfortheCutterfundwere:
Johnson
Meinrod
A) Correct
Correct
B) Correct
Incorrect
C) Incorrect
Incorrect
Explanation
Johnsoniscorrect.Abenchmarkshouldbeinvestable,whichmeanthatthemanagershouldbeabletoreplicatethesecurities
inthebenchmark.Meinrodisincorrect.Althoughabenchmarkshouldbereflectiveofcurrentinvestmentopinion,thisproperty
doesnotmeanthatamajorityofinvestorswouldfavorthesecuritiesinthebenchmark.Insteaditmeansthatthemanagercan
categorizethesecuritiesthatcomposethebenchmark(e.g.,value,growth,highyield.)andhasanopinionregardingtheir
attractivenessasaninvestment.Thisopinioncanbepositive,negative,orneutral.(StudySession17,LOS34.f)
Question#117of169
WhatistheportionofCutter'sreturnduetoactivemanagement?
A) 1.10%.
B) 0.30%.
QuestionID:465715
C) 0.80%.
Explanation
TheportionofCutter'sreturnduetoactivemanagementistheportfolioreturnminusthereturnonthebenchmark:4.90%
5.20%=0.30%.(StudySession17,LOS34.e)
Question#118of169
QuestionID:465716
WhatistheportionofCutter'sreturnduetostyle?
A) 0.30%.
B) 1.10%.
C) 0.80%.
Explanation
TheportionofCutter'sreturnduetostyleisthebenchmarkreturnminusthemarketindexreturn:5.20%4.10%=1.10%.
(StudySession17,LOS34.e)
Question#119of169
QuestionID:465731
Whichofthefollowingisleastlikelytobeastepintheconstructionofacustomsecuritybasedbenchmark?
A) Rebalancetheportfolioonaperiodicbasis.
B) Minimizemisfitriskforthebenchmark.
C) Usethesameassetsforthebenchmarkasthemanager.
Explanation
Misfitriskresultsfromdifferencesbetweenthemanager'snormalportfolioandthebroaderassetclassbenchmark.Ina
customsecuritybasedbenchmark,therewillbeandshouldbemisfitriskifthemanager'sstyleisdifferentthanthebroad
marketandifthecustombenchmarkaccuratelyreflectsthemanager'sstyle.
Question#120of169
QuestionID:465780
Whichofthefollowingleastaccuratelycharacterizesfundamentalfactormodelattributionandallocation/selectionattribution?
A) Allocation/selectionattributioncanleadtospuriouscorrelations.
B) Securityweightsneedtobedeterminedatthestartoftheevaluationperiodin
allocation/selectionattribution.
C) Allocation/selectionattributionisrelativelyeasytocalculate.
Explanation
Itisactuallyfundamentalfactormodelattributionthatcanleadtospuriouscorrelationsbecausetheanalysisisquitecomplex.
Question#121of169
QuestionID:465742
Therearetwobasicformsofperformanceattribution,microandmacroattribution.Whichofthefollowingstatementsaboutthe
twoapproachesismostaccurate?
MacroPerformance
MicroPerformance
A) Atinvestmentmanagerlevel, Atfundsponsorlevel,
rateofreturnmetriconly
B) Atfundsponsorlevel,
rateofreturnmetric
Atinvestmentmanagerlevel,
rateofreturnandvaluemetric rateofreturnandvaluemetric
C) Atfundsponsorlevel,
Atinvestmentmanagerlevel,
Explanation
Macroperformanceiscarriedoutatthefundsponsorlevel,microperformanceattheinvestmentmanagerlevel.Bothrateof
return(percentageterms)andvaluemetrics(monetaryterms)areused.
Question#122of169
QuestionID:465785
Whichofthefollowingwouldbeleastlikelytobeusedinbothreturnsbasedstyleanalysisandfundamentalfactormodelmicro
attribution?
A) Theamountofleverageusedinthefund.
B) Thereturnstoasmallcapstockindex.
C) Thesensitivitiesoftheportfoliotoindexreturns.
Explanation
Bothreturnsbasedstyleanalysisandfundamentalfactormodelmicroattributionwouldutilizethereturnstovariousindicesas
wellasthesensitivitiestotheindices.However,returnsbasedstyleanalysiswouldnotexaminefundamentalfactorssuchas
theleverageinthefundandthesizeofthestocksinthefund.
Question#123of169
QuestionID:465808
Ananalysthasgeneratedthefollowinginformationaboutrisk/returnperformanceusingtheSharperatioandtheTreynor
measure:
Equity
Fund
S&P500
Sharperatio
0.47
0.42
Treynormeasure
0.31
0.34
Whichofthefollowingstatementsabouttherelativerisk/returnperformanceofthefundsisCORRECT?
A) TheSharperatioshowstheequityfundoutperformedtheS&P500onatotal
riskadjustedbasis.
B) TheTreynormeasureshowsthefundoutperformedtheS&P500onasystematicrisk
adjustedbasis.
C) TheTreynormeasureshowsthefundunderperformedtheS&P500onatotalrisk
adjustedbasis.
Explanation
WitheithertheSharpeorTreynormethodology,ahighernumbermeansahigherriskadjustedreturn.SincetheSharperatio
is0.05higher,itoutperformedtheS&P500.NotethatthekeydifferencebetweentheSharpeandTreynormeasuresisthat
theSharperatiomeasuresreturnperunitoftotalrisk,whileTreynormeasuresreturnperunitofsystematicrisk.
Question#124of169
QuestionID:465705
Whichofthefollowingleastaccuratelycharacterizesthetimeweightedreturn?Thetimeweightedreturn:
A) canbeexpensiveanderrorprone.
B) issimilartotheinternalrateofreturn.
C) ismostappropriateforamanagerwhocannotcontrolthetimingofthecashflowsin
andoutofthefund.
Explanation
Thetimeweightedreturnisnotsimilartotheinternalrateofreturn.Themoneyweightedreturnissimilartotheinternalrateof
returnandisalsoknownasthelinkedinternalrateofreturn.Theotherresponsesaccuratelycharacterizethetimeweighted
return.
Question#125of169
QuestionID:465857
JackGallonisaportfoliomanagerwhosefundsponsorwouldliketoevaluatehisperformance.Itisveryimportanttothefund
sponsortominimizetrackingrisk.Whichofthefollowingwouldbemostappropriateforevaluatinghisperformance?
A) Theinformationratio.
B) TheTreynorratio.
C) Jensen'salpha.
Explanation
Theinformationratioisthemanager'sexcessreturn(relativetoabenchmarkreturn)dividedbythestandarddeviationof
excessreturns.Becauseitmeasuresriskandreturnrelativetoabenchmark,itwouldbethemostappropriatemeasurewhen
theminimizationoftrackingriskisimportant.
MegaMarketing(Mega),anadvertisingagencythatspecializesincreatingmarketingmaterialsforthefinancialservices
industry,hasjusthiredKinaraYamisaka.YamisakawasafinancemajorincollegeandisacandidatefortheCFAprogram.
Shewashiredbecausehersupervisor,JackGoode,realizedthatthefirmneededmoredepthintheareaofinvestment
performanceanalysisifitwantedtoretainand/orexpanditsbusinesswithmoneymanagers.
MegaMarketingispreparingadvertisinginformationforVegaFundsLimited.Vegahasprovidedthefollowingfiveyearannual
returndata:
VegaFundsLimited*
*Year5ismostrecentperiod
Year
Return
10%
25%
5%
30%
5%
Toassessherunderstandingofreturns,GoodehasaskedYamisakatocalculateanumberofdifferentreturnsincluding
arithmetic,geometric,annualizedandmoneyweightedreturns.Healsoaskstodeterminetheimpactofthefollowingcash
flowscenariosonVega'sreturns:
CashFlows
Scenario1 Scenario2 Scenario3
BeginningMarketValue
$100
$100
$100
EndofYear2Deposit(Withdrawal)
None
20
(10)
???
???
???
EndofYear5MarketValue
BeforeleavingYamisaka'soffice,Goodecomments,"It'sgreattohavesomeonelikeyouonboard.Pleasebesureto
thoroughlyunderstandthethreestepsinperformanceevaluation,particularlyperformanceattributionwhichinvolvesthe
subjectivejudgmentofamanager'sskillbyusingriskadjustedmeasuresorbenchmarkcomparisons."
Yamisakareplies,"Ithoughtperformanceattributionwastheprocessofbreakingdownamanager'sperformanceinto
componentsofreturn,butI'llbesuretobrushuponallthreesteps."
"Great,"saysGoode."Whileyou'reatit,howaboutfinishingthefollowingexhibitforme?"
Exhibit1ReturnCalculations
Return
Definition
1.Holding
Returnoveraspecifiedholdingperiod.Onlyaccuratelymeasuresthe
Period
performancewhennocashinfusion/withdrawalshavebeenmade.
Equatesthefuturevalueofnetinflows(madeinthepast)withthepresent
2.
valueoftheportfoliosuchthatnetpresentvalue=zero.Theinternalrateof
return.
Geometricmeanofthesingleholdingperiodreturnsearnedoverthe
3.
measurementperiod,whereholdingperiodsareboundedbyexternalcash
flows.
Question#126of169
QuestionID:465699
WhatisVega'sgeometricaveragereturnperyear(overthe5yearperiod)?
A) 7.85%.
B) 9.00%.
C) 15.14%.
Explanation
RGeometric=[(1+R1)(1+R2)...(1+RN)]1/N1
=[(0.9)(1.25)(0.95)(1.30)(1.05)]1/51=7.85%(StudySession17,LOS34.c)
Question#127of169
QuestionID:465700
WhatareVega'smoneyweightedaveragereturnsperyear(overthe5yearperiod)forScenarios2and3?
Scenario2
Scenario3
A) 7.96%
7.78%
B) 9.00%
7.85%
C) 7.78%
7.96%
Explanation
ScenarioB:IfV0=100.000,V1=100*(10.10)=90,V2=90*(1.25)+20=132.50,V3=132.5*(0.95)=125.875,V4=
125.875*(1.30)=163.6375,V5=163.6375*(1.05)=171.819
171.819=100(1+R)5+20(1+R)3
KeystrokesontheTIBAIIPlustosolveforR:
CF 2nd CLRWORK
100 ENTER
0 ENTER
20 ENTER
0 ENTER
0 ENTER
171.819 ENTER
IRRCPT 7.96
ScenarioC:IfV0=100.000,V1=100*(10.10)=90,V2=90*(1.25)10=102.50,...,V5=132.917
132.917=100(1+R)510(1+R)3
KeystrokesontheTIBAIIPlustosolveforR:
CF 2nd CLRWORK
100 ENTER
0 ENTER
10 ENTER
0 ENTER
0 ENTER
132.917 ENTER
IRRCPT 7.78
Question#128of169
QuestionID:465701
YamisakahasdeterminedthattheaveragemonthlyreturnofanotherMegaclientwas1.63%duringthepastyear.Whatisthe
annualizedrateofreturn?
A) 21.41%.
B) 12.14%.
C) 5.13%.
Explanation
Annualreturn=(1+averagesubperiodreturn)numberofsubperiodsperyear1.
Annualreturn=(1.0163)121=.21412or21.412%.
Question#129of169
QuestionID:465702
ConcerningthecommentsofGoodeandYamisakaaboutperformanceattribution:
A) GoodeisincorrectYamisakaiscorrect.
B) GoodeiscorrectYamisakaisincorrect.
C) GoodeiscorrectYamisakaiscorrect.
Explanation
Thethreestepsinperformanceevaluationaremeasurement,attributionandappraisal.Measurementisthecalculationof
returnrealizedoveraspecifiedperiod.Attributionbreaksdownperformanceintocomponentsofreturn(assetallocation,
sector,security,etc.).Appraisalistheassessmentofmanagerskillusingcomparativemeasuressuchasbenchmarks(peer
universeorindex),riskadjustedreturnsortheimpactofcurrencymanagementdecisions.(StudySession17,LOS34.b)
Question#130of169
Thetwotypesofreturncalculationmethods(2,3)missingfromExhibit1are:
QuestionID:465703
A) 2.moneyweighted3.timeweighted.
B) 2.timeweighted4.dollarweighted.
C) 2.dollarweighted3.moneyweighted.
Explanation
Moneyweightedanddollarweightedaretwonamesforthesamereturncalculationmethod.Timeweightedandgeometric
returnsarealsojustdifferenttermsforthesamemethodofcalculation.Thecorrectsequenceisthereforemoney(dollar)
weightedandtime(geometric)weighted.(StudySession17,LOS34.c)
Question#131of169
QuestionID:465704
Thereturncalculationmethodmostappropriateforevaluatingtheperformanceofaportfoliomanageris:
A) geometric.
B) moneyweighted.
C) holdingperiod.
Explanation
Geometric(timeweighted)returnsprovidethebestestimateofaportfoliomanagersreturnbecauseitneutralizestheimpact
oftheclient'scashflowdecisions.(StudySession17,LOS34.c)
Question#132of169
QuestionID:465856
TheInformationratioisalsoreferredtoasthebenefitcostratio.Whatiscostdefinedas?
A) Thestandarddeviationofportfolioreturns.
B) Thestandarddeviationofsurplusreturns.
C) Thestandarddeviationofbenchmarkreturns.
Explanation
Theinformationratioiscalculatedasthesurplusreturndividedbythestandarddeviationofsurplusreturns.Thecostinthe
informationratioisthestandarddeviationofsurplusreturns.
Question#133of169
WhichofthefollowingriskmeasuresisNOTdependentoncapitalassetpricingmodel(CAPM)?
A) Sharpemeasure.
B) Neitherofthese.
C) Jensenmeasure.
Explanation
TheSharpemeasureusesstandarddeviationasitsriskmeasure.TheJensenmeasureusesbeta.
QuestionID:465818
Question#134of169
QuestionID:465800
OftheSharpe,Treynor,andJensen'sAlphameasures,whenmeasuringtherisk/returnperformanceofactivelymanaged
portfolios,whichisthemostappropriatetouse?
A) Sharperatio.
B) Jensen'sAlpha.
C) Bothmeasuresareequallyappropriate.
Explanation
Jensen'sAlphameasuresthevalueaddedofanactiveportfoliostrategy.
Question#135of169
QuestionID:465858
JimKylehasbeenthemanageroftheSuperiorAssetPortfolioforthepasttenyears.Duringthistime,Superior'saverage
returnwas14.50%.Forthepurposeofperformanceevaluation,theSuperiorAssetPortfolioiscomparedtotheS&P500.
Duringthesametimeperiod,theS&P500hadanaverageannualreturnof18%.Thestandarddeviationofsurplusreturnis
23%.WhatisSuperior'sinformationratio?
A) 0.56.
B) 0.15.
C) 0.16.
Explanation
Informationratio=IRj=SRj/SR=(14.5018)/23=0.15
PensionAdvisors,Inc.(PAI),hasbeenaskedbyEfficientIndustries(Efficient)toevaluatethepensionfund'sbondmanagers.
EfficientiscurrentlyusingAlphaFixedIncomeManagement(Alpha)andBetaBondAdvisors(Beta).EfficienthiredAlphaon
thebasisofitsproprietaryrateanticipationmodel.Betawasengagedbecauseofitsfundamentalanalysisprocessfor
identifyingundervaluedsecurities.
Bondreturnsoverthetrailingoneyearperiodhavebeenunusuallyrobustduetoaseriesofaggressiveratecutsbythe
FederalReserve.Thetrusteesareconcernedthatthemanagersmayhavestrayedfromtheirstatedinvestmentprocessesin
anattempttocapitalizeontheextraordinaryeconomicandmonetaryenvironment.
ArtGunnlow,aPAIanalyst,hasbeenassignedthetaskofreviewingthedataandpreparingareportforEfficient.Gunnlowhas
assembledthefollowingquarterlyreturnsforAlphaandBeta:
Quarter AlphaReturn BetaReturn

1
4.63%
1.95%
0.89%
1.15%
7.38%
2.07%
1.35%
1.45%
Alpha'strailingreturnwas1.38%inexcessofitsmarketportfoliobenchmark,whileBeta'sreturnwas0.53%inexcessofits
correspondingindexbenchmark.
Question#136of169
QuestionID:465707
WhatareAlpha'stimeweightedquarterlyaverageandannualizedreturns,respectively,fortheoneyearperiod?
Quarterly
Annual
A) 1.654%
6.783%
B) 3.529
14.881%
C) 3.529%
6.783%
Explanation
QuarterlyReturn=[(1+R1)(1+R2)...(1+RN)]1/N1
QuarterlyReturn=[(1.0463)(1.0089)(1.0738)(1.0135)]1/41=3.529%
AnnualReturn=(1+averagesubperiodreturn)#ofsubperiodsperyear1
AnnualReturn=(1.03529)41=0.14881or14.881%
Question#137of169
QuestionID:465708
WhatareBeta'stimeweightedquarterlyaverageandannualizedreturns,respectively,fortheoneyearperiod?
Quarterly
Annual
A) 1.654%
3.529%
B) 1.654%
6.783%
C) 3.529%
14.882%
Explanation
QuarterlyReturn=[(1+R1)x(1+R2)...(1+RN)]1/N1
QuarterlyReturn=[(1.0195)(1.0115)(1.0207)(1.0145)]1/41=1.654%
AnnualReturn=(1+averagesubperiodreturn)#ofsubperiodsperyear1
AnnualReturn=(1.01654)41=0.06783or6.783%
Question#138of169
QuestionID:465694
Themoneyweightedreturnmeasuresthe:
A) totalreturnduringtheperiod.
B) returnperunitofdomesticcurrency.
C) returnontheaverageinvestmentduringtheperiod.
Explanation
Themoneyweightedreturnmeasuresthereturnontheaverageinvestmentduringaspecifictimeperiod.Themoney
weightedreturncomputationusestheconceptofaninternalrateofreturn.
Question#139of169
QuestionID:465823
Thefollowingfourfundsarebeingconsideredforinvestment.IfTreasurybills(Tbills)yielded5%duringtheperiod,whichfundhadthe
highestaverageannualreturn?
Fund TreynorMeasure Beta Std.Dev.
A
0.12
1.10
0.14
0.17
1.25
0.21
0.21
0.80
0.10
A) FundC.
B) FundA.
C) FundB.
Explanation
Fund TreynorMeasure
Beta
Std.Dev. Returns
0.12
1.10
0.14
18.2%
0.17
1.25
0.21
26.3%
0.21
0.80
0.10
21.8%
TheTreynorMeasure=(returnoftheportfolioreturnofriskfreeasset)/Beta.
Solveforthereturnoftheportfolio.
Question#140of169
Whichofthefollowingstatementsabouttheevaluationofportfolioperformanceisleastaccurate?
A) Thesecuritymarketline(SML)representsanactiveinvestmentstrategywhen
Jensen'sAlphaisusedasthemeasureforportfolioperformance.
B) WhenusingtheSharperatio,theportfoliowiththehighestcapitalallocationline(CAL)
slopeisthebestportfolio.
QuestionID:465799
C) Inthedecompositionofportfolioperformance,anaiveportfolioisconstructedwithits
standarddeviationsetequaltothetotalriskofthemanager'sportfoliothatisbeing
evaluated.
Explanation
TheSMLisapassivestrategyinthattheinvestorinvestsinacombinationofthemarketportfolioandtheriskfreeasset.
Jensen'sAlphameasuresthevalueaddedreturnduetoactivemanagement.
Question#141of169
QuestionID:465733
FundSponsorsoftenusethemedianaccountinaparticularuniverseofaccountreturnsasanappropriatebenchmark.This
formofbenchmarkhasanumberofdrawbacks.WhichofthefollowingisNOTadrawbackthatwouldbeassociatedwithusing
themedianaccountasabenchmark?
A) Asthemedianmanagerisunknown,themeasureisambiguous.
B) Itisnotmeasurableasitsvaluecannotbedeterminedonareasonablyfrequent
basis.
C) Itisvirtuallyimpossibletoidentifythemedianmanagerinadvance.
Explanation
Therearesevenpropertiesofavalidbenchmark.Withregardtothemedianaccountapproach,itsvalueismeasurable.This
isprobablytheonlycriteriathatthemedianmanagerapproachsatisfies.Theotherstatementsaretrueofthemedianaccount.
Question#142of169
QuestionID:465692
Onelimitationofthemoneyweightedreturnisthefactthatit:
A) penalizesmanagersforcashflowsthatoccuroutsideoftheircontrol.
B) computesthereturnindependentofthecashflows.
C) requirescomputationseverytimeacashflowoccurs.
Explanation
Themoneyweightedreturncomputationpenalizesmanagersforcashflowsthatoccuroutsideoftheircontrol.
Question#143of169
QuestionID:465801
OftheSharpe,Treynor,andJensen'sAlphameasures,whendealingwithasectorfundwhichwillbeaddedtotheinvestor's
overalllargerportfolio,whichisthemostrelevantmeasurementtechniquetoassessrelativerisk/returnperformance?
A) Bothmeasuresareequallyappropriate.
B) Sharperatio.
C) Treynormeasure.
Explanation
TheTreynormeasurecalculatesexcessreturnrelativetosystematicriskandshouldbeusedtoevaluateportfoliosthatwillbe
anadditiontoanoveralllargerportfolio.Sharperatio,whichusesstandarddeviationastheriskmeasure,shouldbeusedto
evaluateportfoliosthatwillcomprisethemajorityoftheinvestor'soverallassetbase.
Question#144of169
QuestionID:465695
Thetimeweightedreturnmeasuresthe:
A) totalreturnduringtheperiod.
B) returnperunitofdomesticcurrency.
C) returnontheaverageinvestmentduringtheperiod.
Explanation
Thetimeweightedreturnmeasuresthereturnperunitofdomesticcurrency.Thecalculationinvolvestakingageometric
averageofthereturnsofthevarioussubperiods.
Question#145of169
QuestionID:465730
Whichofthefollowingisleastlikelytobeastepintheconstructionofacustomsecuritybasedbenchmark?
A) Usethesameweightsforthebenchmarkasthemanager.
B) Identifythemanager'sinvestmentprocess.
C) Calculatethehistoricalmeanandstandarddeviationforthebenchmark.
Explanation
Althoughcalculatingthehistoricalmeanandstandarddeviationforthebenchmarkissomethingthatmanyportfoliomanagers
willdo,itisnotspecifiedasoneofthestepsintheconstructionofacustomsecuritybasedbenchmark.
Question#146of169
QuestionID:465810
Whichofthefollowingstatementsaboutrisk/returninvestmentmanagerperformancemeasuresisleastaccurate?
A) TheSharpemeasureincludescompanyspecificriskaspartofitsperformance
measurement.
B) Whenmeasuringtheperformanceofanequityfund,iftheSharperatiois0.55,and
theTreynormeasureis0.47,thedifferenceisattributabletounsystematic(company
specific)risk.
C) TheTreynormeasureincludescompanyspecificriskaspartofitsperformance
measurement.
Explanation
TheTreynormeasuredoesnotincludecompanyspecificrisk,itusesbetainthedenominator,whichonlymeasures
systematicrisk.NotethattheSharpemeasureusesstandarddeviationinitsdenominator,whichisameasureoftotalrisk.
Question#147of169
QuestionID:465816
BillSmithisevaluatingtheperformanceoffourlargecapequityportfolios:FundsA,B,CandD.Aspartofhisanalysis,Smith
computedtheSharperatioandtheTreynormeasureforallfourfunds.Basedonhisfinding,theranksassignedtothefour
fundsareasfollows:
Fund TreynorMeasureRank SharpeRatioRank
A
ThedifferenceinrankingsforFundsAandDismostlikelydueto:
A) differentbenchmarksusedtoevaluateeachfund'sperformance.
B) adifferenceinriskpremiums.
C) alackofdiversificationinFundAascomparedtoFundD.
Explanation
ThemostlikelyreasonforadifferenceinrankingisduetotheabsenceofdiversificationinFundA.TheSharperatio
measuresexcessreturnperunitoftotalrisk,whiletheTreynorratiomeasuresexcessreturnperunitofsystematicrisk.Since
FundAperformedwellontheTreynormeasureandsopoorlyontheSharpemeasure,itseemsthatthefundcarriesagreater
amountofunsystematicrisk,meaningitisnotwelldiversifiedandsystematicriskisnottherelevantriskmeasure.
Question#148of169
QuestionID:465803
period.
EquityFundS&P500
Return27%29%
Beta0.951.00
Riskfreerateis4.00%
TheTreynormeasureandtheSharperatio,inthatorder,fortheS&P500are:
A) 0.18and1.11.
B) 0.33and0.97.
C) 0.25and1.25.
Explanation
Treynormeasure:(0.290.04)/1.00=0.25
Sharperatio:(0.290.04)/0.20=1.25
Question#149of169
QuestionID:465686
Inthemanagementofafund,performanceevaluationispartof:
A) thestrategicdecisionmakingstepoftheinvestmentmanagementprocess.
B) thefeedbackstepoftheinvestmentmanagementprocess.
C) thecompensationcomputationoftheinvestmentmanagementprocess.
Explanation
Performancevaluationispartofthefeedbackstep.
Question#150of169
QuestionID:465824
period.
EquityFundS&P500
Return21%24%
Beta1.051.00
Riskfreerateis4.50%
TheSharperatiofortheequityfundis:
A) 0.87.
B) 0.76.
C) 0.84.
Explanation
(0.210.045)/0.19=0.87.
Question#151of169
YoumanagetheUBZBalancedFund,andthefollowingdataapply.
AssetClass FundWeight BenchmarkWeight FundReturn(%) BenchmarkReturn(%)
QuestionID:465761
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
Thevalueaddedattributabletothepuresectorallocationeffectis:
A) 0.291%.
B) 0.485%.
C) 0.600%.
Explanation
Theoverallbenchmarkreturn=6.705%.
Thesectoreffect=[(portfoliowt.bench.wt.)(bench.sectorreturnbench.overallreturn)]=[(0.6250.500)(8.646.705)]+[(0.250
0.333)(5.926.705)]+[(0.1250.167)(2.476.705)]=0.485%.
Question#152of169
QuestionID:465784
Whichofthefollowingstatementsregardingfundamentalfactormodelmicroattributionisleastaccurate?
A) Theresultswilllookverysimilartoareturnsbasedstyleanalysis.
B) Theresultswillindicatethesourceofportfolioreturns,baseduponbenchmarkfactor
exposuresversusthemanager'snormalfactorexposures.
C) Itwillbenecessarytoidentifythefundamentalfactorsthatwillgeneratesystematic
returns.
Explanation
Theresultswillindicatethesourceofportfolioreturns,baseduponactualfactorexposures(notbenchmark)versusthe
manager'snormalfactorexposures.Bothoftheotherstatementsaretrueinthecontextoffundamentalfactormodelmicro
attribution
Question#153of169
Considerthefollowingrelationships:
A=PB
S=BM
where:
A=themanagement'sactivemanagementdecisions
P=theinvestmentmanager'sportfolioreturn
B=thebenchmarkreturn
QuestionID:465735
S=themanager'sinvestmentstyle
M=themarketindex
Inthecontextofsystematicbiaswhichofthefollowingoutcomesismostdesirable?
A) Amanager'sactivereturnsshouldbenegativelycorrelatedwiththemanager's
investmentstyle.
B) Amanager'sactivereturnsshouldbeuncorrelatedwiththemanager'sinvestment
style.
C) Amanager'sactivereturnsshouldbepositivelycorrelatedwiththemanager's
investmentstyle.
Explanation
Amanager'sactivereturnsshouldbeuncorrelatedwiththemanager'sinvestmentstyle.
Question#154of169
QuestionID:465689
Whichofthefollowingisthemostlikelyimpactofreceivingacontributionintoanaccountatthebeginningoftheperiodas
opposedtotheendofthemonth?
A) Returnwillbelowerbecausetheimpactonthenumeratoroutweighsthe
impactofthecontributiononthedenominator.
B) Returnwillbeunaffectedattheimpactofthecontributionhasanequalimpactonthe
numeratoranddenominator.
C) Returnwillbelowerbecausethecontributionisaddedtotheassetsinthe
denominatorandreducesthesizeofthenumerator.
Explanation
Ifyouconsiderthecalculationofreturnwhenacontributionisreceivedatthebeginningoftheperiod,itisaddedtothe
openingmarketvalue.Thisincreasesthedenominator,whichisnowopeningmarketvalueplusthecontribution.Inthe
numerator,theadditionofthecontributiontotheopeningmarketvaluereducesthedifferencebetweenthisvalueandthe
closingvalueattheendofthemonth.Thereisalargerdenominatorandasmallernumerator.Therefore,returnmustbe
reduced.
Question#155of169
Inglobalperformanceevaluation,performanceattributionseeksto:
A) identifythesourcesofdifferencebetweenportfolioandbenchmarkreturn.
B) measuretheriskandreturnoftheportfolio.
C) differentiatewhetherreturnscomefromamanager'sluckorskill.
Explanation
QuestionID:465690
Performanceattributionseekstoidentifythesourcesofdifferencebetweenportfolioandbenchmarkreturn.Notethat
performancemeasurementinvolvesthecalculationofriskandreturn,whileperformanceappraisalseekstoidentifywhether
returnsarearesultofamanager'sluckorskill.
Question#156of169
QuestionID:465782
WhichofthefollowingisNOTarecognizedweaknessofallocation/selectionattribution?
A) Securityselectiondecisionshaveaknockoneffectonsectorweighting
decisions.
B) Exposurestothefactorsneedtobedeterminedatthestartofanevaluationperiod.
C) Canbeconfusingasitreflectsthejointeffectofallocatingweightstobothsecurities
andsectors.
Explanation
Exposuretothefactorsneedtobedeterminedatthestartofanevaluationperiodisaweaknessoffundamentalfactormodel
attribution.
Question#157of169
QuestionID:465783
Whichofthefollowingstepsintheconstructionsofasuitablefundamentalfactormicroattributionisleastaccurate?
A) Specifyabenchmark.
B) Determinetheperformanceofeachofthefactors.
C) Identifythefundamentalfactorsthatdetermineunsystematicreturns.
Explanation
Itisnecessarytodeterminethefundamentalfactorsthatdeterminethesystematic(nounsystematic)returns.Bothoftheother
statementsarecorrect.
Question#158of169
QuestionID:465737
Thereshouldbeminimalsystematicbiasinthebenchmarkrelativetotheaccount.Whichofthefollowingstatementsabout
systematicbiasisleastaccurate?
A) Abetasignificantlybelowonewouldbeidealasthiswouldindicatethatthe
manager'saccountissignificantlylessriskythanthebenchmark.
B) Themanagercancalculatethehistoricalbetaoftheaccounttothebenchmark.
C) Amanager'sactivedecisionsshouldbeuncorrelatedwiththemanager'sinvestment
style.
Explanation
Ideally,themanagerwouldbelookingforabetaclosetoone.Thiswouldindicatethattheportfolioandbenchmarkare
sensitivetothesamesystematicfactors,whichwouldbeadesirablecharacteristic.Ifthebetadifferssignificantlyfromone,the
benchmarkmayberespondingtoadifferentsetoffactors,whichisnotadesirablecharacteristicofabenchmark.
Question#159of169
QuestionID:465807
TheTreynormeasureiscorrectlydefinedasameasureofafund's:
A) excessearnedcomparedtoitssystematicrisk.
B) returnearnedcomparedtoitssystematicrisk.
C) returnearnedcomparedtoitsunsystematicrisk.
Explanation
TheTreynormeasureisdefinedasafund'sexcessreturn(fund'sreturnminustheriskfreerate)dividedbyitssystematicrisk
(beta).
Question#160of169
QuestionID:465685
Withrespecttothelevelofreturnandhowthereturnwasearned,performanceevaluationshould:
A) giveanindicationofboththelevelofreturnandhowthereturnwasearned.
B) giveanindicationofthelevelofreturnbutnothowthereturnwasearned.
C) notgiveanindicationofeitherthelevelofreturnorhowthereturnwasearned.
Explanation
Performanceevaluationismorethanasimpleexerciseincalculatingratesofreturn.Rather,itprovidesanexhaustive"quality
control"check,emphasizingnotonlytheperformanceofthefundanditsconstituentpartsrelativetoobjectives,butthe
sourcesofthatrelativeperformanceaswell.
ThefollowingperformancedataforanactivelymanagedportfolioandtheS&P500Indexisreported:
ActivelyManagedPortfolio
S&P500
Return
50%
20%
Standarddeviation
18%
15%
Beta
1.1
1.0
Riskfreerate=6%.
Question#161of169
DeterminetheSharpemeasure,Treynormeasure,andJensen'salphafortheactivelymanagedportfolio.
A) Sharpemeasure=1.04Treynormeasure=0.14Alpha=0.04.
QuestionID:465813
B) Sharpemeasure=1.05Treynormeasure=0.17Alpha=0.04.
C) Sharpemeasure=2.44Treynormeasure=0.40Alpha=0.29.
Explanation
Sharpemeasureforactiveportfolio=(0.500.06)/0.18=2.44
Treynormeasureforactiveportfolio=(0.500.06)/1.1=0.40
Alphaforactiveportfolio=0.50[0.06+(0.200.06)1.1)]=0.29
Question#162of169
QuestionID:465814
BasedontheresultsfromdeterminingtheSharpemeasure,Treynormeasure,andJensen'salphafortheactivelymanaged
portfolio,doestheportfoliomanageroutperformorunderperformtheS&P500index?
A) SharpemeasureunderperformTreynormeasureoutperformAlpha
outperform
B) SharpemeasureoutperformTreynormeasureoutperformAlpha
outperform.
C) SharpemeasureoutperformTreynormeasureunderperformAlpha
underperform.
Explanation
SharpemeasureforS&Pportfolio=(0.200.06)/0.15=0.93
TreynorMeasureforS&Pportfolio=(0.200.06)/1.0=0.14
AlphaforS&Pportfolio=0
Hence,theportfoliomanageroutperformsbasedonallthethreeperformanceevaluationmethods.
Question#163of169
QuestionID:465859
Aportfoliomanagerhasawelldiversifiedportfolioandtheyaretryingtodeterminewhetherornottoaddaparticularstockto
theportfoliotoincreasetheportfolio'soverallriskadjustedreturn.Todecidewhetherornottoaddthestockthemanagerwill
backtesttheportfoliobasedonhistoricaldataofthestockandtheportfolio.Therelevantmeasuretouseincomparingthe
resultsofthebacktestedmodelcomparingtheresultsoftheportfoliobeforeandaftertheadditionofthestockwouldbethe:
A) Treynormeasure.
B) Sharperatio.
C) Informationratio.
Explanation
Thegoalistoaddagreaterreturntotheportfoliowithoutappreciablyincreasingthelevelofrisk.Sincetheportfolioisalready
welldiversifiedmostofitsriskisrelatedtosystematicrisk(beta)whichistherelevantmeasureofriskinthedenominatorof
theTreynormeasure.Addingoneriskystocktoanalreadydiversifiedportfoliowillnotappreciablychangetheoverallriskof
theportfoliothusbetaandtheTreynormeasureremaintherelevantmeasuresusedtocomparetheresultsoftheportfolio
withandwithouttheadditionofthestock.TheSharperatiousesstandarddeviationinthedenominatoroftheequation.
Standarddeviationiscomprisedofsystematicrisk(beta)andunsystematicrisk.Iftheportfoliowasnotwelldiversifiedthen
mostoftheriskwouldbeunsystematicorcompanyspecificrisk.Addingonestocktoanundiversifiedportfoliowouldmost
likelystillleavealotofunsystematicriskthusmakingstandarddeviationandtheSharperatiotherelevantmeasuresifthe
portfoliowasundiversified.Theinformationratioisusedtocomparethereturntoabenchmarkwhichisnotaconcerntothe
portfoliomanagerinthisquestion.
Question#164of169
QuestionID:465736
WhichofthefollowingstatementswithregardtotestsofbenchmarkqualityisCORRECT?
A) Anactivepositionisthedifferencebetweentheweightofasecurityinthe
managedportfolioversusthebenchmark.
B) Trackingerrorisdefinedasthevarianceoftheexcessreturnsearnedduetoactive
management.
C) Anaccount'sexposuretosystematicriskshouldbesimilartothoseofthebenchmark
atalltimes.
Explanation
Trackingerrorisdefinedbystandarddeviationnotvariance.Exposuretosystematicriskdoesnotneedtobethesameatall
timesratheritshouldaveragethatofthebenchmark.Thecorrectstatementistheoneinrelationtoactivepositions.
Question#165of169
QuestionID:465739
Withregardtotheuseofvalueaddedreturninthemeasurementofhedgefundperformance,whichofthefollowing
statementsismostaccurate?
A) Valueaddedreturnissimplythedifferencebetweentheportfolioreturnandthe
benchmarkreturn.
B) Althoughweightssumtozeroareturniscalculatedbysummingtheperformance
impactsoftheindividuallongpositions.
C) Valueaddedreturniscalculatedasthedifferencebetweentheportfolioreturn,given
benchmarkweightings,andtheactualportfolioreturn.
Explanation
Toreplicateazeronetassethedgefundtheweightsmustaddtozero.Calculationofreturnisachievedbysummingthe
individuallongandshortpositionsandthevalueaddedreturnisthedifferencebetweentheportfolioreturnandthe
benchmarkreturn.
Question#166of169
QuestionID:465862
WhichofthefollowingisNOTaconclusionthatcouldbederivedfromplottingamanager'svalueaddedreturnsrelativetothe
benchmarkonaqualitycontrolchart?
A) Ifvalueaddedreturnsaredistributedrandomlyaroundthehorizontalaxisthen
manager'saddedvaluereturnsaremoreorlessrandom.
B) Thechartcanbeusedtodeterminewhetherornotthepotentialsuperiorperformance
isstatisticallysignificant.
C) Ifreturnsareconsistentlyabovethehorizontalaxisthiswouldindicatesuperior
performanceonthepartofthemanagerunderreview.
Explanation
Inordertodeterminestatisticalsignificanceorotherwise,confidenceintervalsneedtobeconstructedusingthestandard
deviationofthereturns.Simplylookingatthemanager'svalueaddedreturnsabovehorizontallinealonedoesnottellyouif
thereturnsaresignificantorrandom.
Question#167of169
QuestionID:465815
Thefollowingfiguresprovideperformancedatafortwomanagers,CumulusManagersandSaturnManagers.Thebenchmark
returnis12%anditsstandarddeviationis25%.Theriskfreerateis4.2%.
Return
Cumulus
Saturn
15.0%
18.0%
29.0%
33.0%
0.9
1.3
Standard
Deviation
Beta
Whichofthefollowingwouldbethemostappropriateconclusionregardingtheirrelativeperformance,usingtheM2measure
andtheTreynorratio?
A) SaturnisthesuperiormanagerusingtheM2measurebutnottheTreynorratio.
B) CumulusisthesuperiormanagerusingboththeM2measureandtheTreynorratio.
C) SaturnisthesuperiormanagerusingboththeM2measureandtheTreynorratio.
Explanation
TocalculatetheMsquaredratioforCumulus,usethefollowingformula:
Wewouldcomparethe13.51%tothereturnonthemarketof12%andconcludethattheCumulusFundhassuperior
performance.Usingthesameformulaasabove,theMsquaredmeasurefortheSaturnfundis14.65%,whichindicatesthat
theSaturnfundhassuperiorperformancerelativetoboththemarketandCumulusfund.
TheTreynorratioforCumuluswouldbecalculatedas:
TheTreynorratiofortheSaturnfundis10.6,whichindicatesthattheCumulusfundhassuperiorperformancerelativetothe
Saturnfund.
ThediscrepancybetweenthetwomeasuresisbecausetheMsquaredmeasureusesthestandarddeviation(totalrisk)asthe
measureofriskwhereastheTreynorratiousesbeta(systematicrisk).TheCumulusfundispoorlydiversifiedrelativetothe
Saturnfund.WhenunsystematicriskiscapturedintheMsquaredmeasure,theCumulusfundisnotasattractiveasthe
Saturnfund.
Question#168of169
QuestionID:465728
WhichofthefollowingisNOTregardedtobeanessentialcharacteristicofavalidbenchmark?
A) Specifiedinadvance.
B) Reflectiveofpastinvestmentopinion.
C) Appropriatetothemanager'sinvestmentapproachandstyle.
Explanation
Thebenchmarkhassevencharacteristics.Alloftheaboveareincludedwiththeexceptionof'reflectiveofpastinvestment
opinion,'itshouldbereflectiveofcurrentinvestmentopinion,andthemanagershouldhavecurrentknowledgeandexpertise
ofthesecuritiesinthebenchmark.
Question#169of169
WhichofthefollowingisNOTrequiredformacroperformanceattribution?
A) Fundreturns,valuations,andexternalcashflows.
B) Tacticalassetallocations.
C) Benchmarkportfolioreturns.
Explanation
Therearethreemaininputsintothemacroattributionapproach:
1)policyallocations
2)benchmarkportfolioreturnsand
3)fundreturns,valuationsandexternalcashflows.
QuestionID:465745

11 Evaluating Portfolio Performance

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EvaluatingPortfolioPerformance

AssetClass StarFundWeights StarFundReturns BenchmarkReturns

AssetClass FundWeight BenchmarkWeight FundReturn(%) BenchmarkReturn(%)

DixonFund AdamsFund BouldFund WinterburnFund MarketIndex

PortfolioManager Return Beta

Portfolio Benchmark Portfolio

Weight(%) Weight(%) Return(%)

Scenario1 Scenario2 Scenario3

Quarter AlphaReturn BetaReturn

AssetClass FundWeight BenchmarkWeight FundReturn(%) BenchmarkReturn(%)

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