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Reading 33 Evaluating Portfolio Performance FinQuiz.com FinQuiz.com CFA Level III Item-set - Solution Study Session 17 June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2018 - All rights reserved Reading 33 Evaluating Portfolio Performance FinQuiz.com FinQuiz Level III 2018 – Item-sets Solution Reading 33: Evaluating Portfolio Performance Question ID: 8547 Correct Answer: C The drawbacks of frequent manager firings are: 1) they are a waste of a sponsor’s time and expense Replacing managers involves a significant amount of time and effort 2) Fired manager’s portfolios must be converted to the newly hired manager’s portfolio This conversion involves buying and selling securities which in turn involve trading costs Additionally, a substantial proportion of the fired manager’s portfolio may need to be liquidated in the process of moving assets to a new manager This needs to be done when the manager’s styles are not similar Thus, drawback is incorrect Question ID: 8548 Correct Answer: A The purposes of a MCP include: I II III IV To retain superior managers and remove inferior managers especially when the latter managers exhibit adverse performance Ensuring that relevant nonperformance information is incorporated into the performance evaluation process To minimize managerial turnover To develop organizational process and procedures that will be applied consistently regardless of investment committee and staff changes Question ID: 8549 Correct Answer: C Point I – The goal of manager monitoring is to identify any potential warning signs of adverse changes in the manager’s organization Therefore Point I is correct Point II – Manager monitoring is a formal, documented process that assists the fund sponsor in gathering data pertaining to the manager’s organization Therefore, Point II is correct Point IV – The results of manager monitoring are not meant to impose major changes at the manager’s organization The organization remains stable and managers follow their stated investment strategy regardless of successes or failures of their strategies Point IV is incorrect FinQuiz.com © 2018 - All rights reserved Reading 33 Evaluating Portfolio Performance FinQuiz.com Question ID: 8550 Correct Answer: C As part of the manager monitoring process, the fund sponsors periodically receive information from managers The information is divided into two parts: I II Operational matters such as personnel changes, account growth, and litigation A discussion of the managers’ investment strategies on both a retrospective and prospective basis The fund sponsor should instruct the managers to explain their recent investment strategies relative to their respective benchmarks and how their strategies performed Question ID: 8551 Correct Answer: B Point II – If the monitoring process identifies warning signs, a manager review may become essential Oftentimes the monitoring process identifies items of concern which may need to be further reviewed Point II is correct Point III – The review process closely resembles the selection process with respect to the information considered and the comprehensiveness of the analysis The manager’s operations are scrutinized by the staff in the same procedure as when the manager was initially hired Point III is incorrect Point IV – The review process involves making decisions about whether to retain or fire managers The criteria for conducting this process are similar to the hiring process with the same evaluation criteria being used Point IV is incorrect Question ID: 8552 Correct Answer: C The criteria which is used to evaluate managers in the review process include: I II III a cost and benefit analysis used to determine whether the benefits of hiring a new manager outweigh the costs of firing the previous manager an analysis of the fundamental changes of the manager’s operations an analysis of whether the change is significant and the implications for the change Question ID: 8178 Correct Answer: C An absolute benchmark is often stated as a return objective An example of this benchmark is the minimum return a fund must meet to satisfy retirement liabilities The advantage of this benchmark is that it is conceptually simple as it is the most straightforward benchmark A drawback of this benchmark is that it does not satisfy a benchmark’s validity criteria and does not meet the desired properties of a benchmark FinQuiz.com © 2018 - All rights reserved Reading 33 Evaluating Portfolio Performance FinQuiz.com Question ID: 8179 Correct Answer: A The drawbacks to manager universes include: I The universe compilers can only establish the median account on an ex-post basis Thus, it is not specified in advance II Different accounts represent the median manager and this account keeps changing from one evaluation period to the next Thus, the benchmark is not investable III Fund sponsors tend to terminate underperforming managers, which leads to the issue of survivorship bias Question ID: 8180 Correct Answer: A A Factor-Based Benchmark relates the returns of an account to the returns of the market by capturing those systematic factors that affect the account returns An example of such a model is the market model, which uses beta as the systematic factor However, this benchmark does not relate the beta on the account to market return (which CAPM does), but only accounts for beta as a factor The model expresses the returns of the portfolio as a linear function of the returns on a broad market index 10 Question ID: 8181 Correct Answer: B A manager constructs a custom security-based benchmark by researching the best available investment opportunities Once this research is conducted, the manager weights the securities from the research universe in a particular fashion to construct the benchmark A drawback of the benchmark is that they are composed of unpublished indices, which creates a transparency problem as information on the benchmark may not be widely available in the market An advantage of this technique is that it enables managers to control and monitor their investment process 11 Question ID: 8182 Correct Answer: C A style index represents specific portions of an asset category These indices will lead to a hypothetical segmentation of the portfolio as different portions of the index reflect different investment styles, e.g Small-Cap Growth and Small-Cap Value These indices are easily understood and a drawback of this benchmark is that the index may consist of certain securities and economic sectors whose weight is too large to be considered prudent Also due to differing definitions of investment style, there is a possible conflict between the style defined by the index and the manager’s style reflected by his investment process FinQuiz.com © 2018 - All rights reserved Reading 33 Evaluating Portfolio Performance FinQuiz.com 12 Question ID: 8183 Correct Answer: A A drawback of a broad based market index benchmark is that the manager’s style may deviate considerably from the style reflected in the index This leads to a conflict of style between the manager and the index These indices are widely available FinQuiz.com © 2018 - All rights reserved .. .Reading 33 Evaluating Portfolio Performance FinQuiz. com FinQuiz Level III 2018 – Item- sets Solution Reading 33 : Evaluating Portfolio Performance Question... style reflected by his investment process FinQuiz. com © 2018 - All rights reserved Reading 33 Evaluating Portfolio Performance FinQuiz. com 12 Question ID: 81 83 Correct Answer: A A drawback of a broad... does not meet the desired properties of a benchmark FinQuiz. com © 2018 - All rights reserved Reading 33 Evaluating Portfolio Performance FinQuiz. com Question ID: 8179 Correct Answer: A The drawbacks
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