2019 CFA level 3 qbank reading 36 evaluating portfolio performance answers

10/12/2018 Learning Management System Question #1 of 170 With regard to the use of value added return in the measurement of hedge fund performance, which of the following statements is most accurate? A) Value added return is calculated as the di erence between the portfolio return, given benchmark weightings, and the actual portfolio return B) Value added return is simply the di erence between the portfolio return and the benchmark return .in C) Although weights sum to zero a return is calculated by summing the performance en tre impacts of the individual long positions Explanation bo ok c To replicate a zero net asset hedge fund the weights must add to zero Calculation of return is achieved by summing the individual long and short positions and the value added return is the di erence between the portfolio return and the benchmark return (Study Session 19, Module 36.3, LOS 36.j) Related Material m SchweserNotes - Book w w o Question #2 of 170 Which of the following measures would be the most appropriate one to use when comparing the results of two portfolios in which each portfolio contains only a few number of stocks w representing a limited number of industries? A) Sharpe ratio B) Information ratio C) Treynor measure Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 1/119 10/12/2018 Learning Management System The equations for the measures are as follows: Sharpe ratio = (RP − RF) / σP Treynor measure = (RP − RF) / βP Information ratio = (RP − RB) / (σP − B) in Since both portfolios are not well diversi ed most of their risk comes from unsystematic (company speci c) risk and is not tied to the overall level of risk in the market thus in this case standard deviation is the best measure of risk to use The Sharpe ratio is the best measure to use to compare the two portfolios which are undiversi ed since the Sharpe ratio uses standard deviation or total risk in the denominator of the equation as its measure of risk The Treynor measure uses beta or systematic market risk as the measure of risk in the denominator and the information ratio is best to use when comparing a portfolio to a benchmark en tre (Study Session 19, Module 36.7, LOS 36.q) Related Material Question #3 of 170 bo ok c SchweserNotes - Book Frank Belanger would like to calculate the rate of return for an illiquid asset He states that he m will use matrix pricing to obtain a substitute for the security's current price Which of the o following most accurately describes matrix pricing? In matrix pricing, the analyst uses: w w A) dealer quotes for similar securities B) the price from the last trade for the same security w C) an average of recent prices Explanation Matrix pricing is used when the asset is illiquid and a security price is not readily available In matrix pricing, the analyst uses dealer quoted prices for similar securities (Study Session 19, Module 36.2, LOS 36.d) Related Material SchweserNotes - Book Question #4 of 170 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 2/119 10/12/2018 Learning Management System Which of the following is the least likely to be an input into micro performance evaluation? A) The sector return for the manager B) The return on the risk-free asset C) The weight of a sector in the benchmark Explanation The return on the risk-free asset is not an input into micro performance evaluation but it would be used as an input into macro performance evaluation (Study Session 19, Module 36.3, LOS 36.k) in Related Material en tre SchweserNotes - Book Question #5 of 170 bo ok c Bill Smith is evaluating the performance of four large-cap equity portfolios: Funds A, B, C and D As part of his analysis, Smith computed the Sharpe ratio and the Treynor measure for all four funds Based on his nding, the ranks assigned to the four funds are as follows: Treynor Measure Rank m Fund A 3 w D w w C o B Sharpe Ratio Rank The di erence in rankings for Funds A and D is most likely due to: A) a lack of diversi cation in Fund A as compared to Fund D B) a di erence in risk premiums C) di erent benchmarks used to evaluate each fund’s performance Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 3/119 10/12/2018 Learning Management System The most likely reason for a di erence in ranking is due to the absence of diversi cation in Fund A The Sharpe ratio measures excess return per unit of total risk, while the Treynor ratio measures excess return per unit of systematic risk Since Fund A performed well on the Treynor measure and so poorly on the Sharpe measure, it seems that the fund carries a greater amount of unsystematic risk, meaning it is not well diversi ed and systematic risk is not the relevant risk measure (Study Session 19, Module 36.7, LOS 36.p) Related Material in SchweserNotes - Book en tre Question #6 of 170 Suppose that all of a rm's managers are outperforming the benchmark, some by a little, some by a lot If the dence intervals for a quality control charts in portfolio management were widened, what would the most likely e ect be? bo ok c A) Type I error would become less likely and Type II error would become more likely B) Type I error would become more likely and Type II error would become less likely C) Type I error would become more likely and Type II error would become more likely m Explanation w w o Type I error is retaining a poorly performing manager If the dence intervals are widened and a poor manager is barely outperforming the benchmark, it is less likely that they will have statistically signi cant excess returns We are thus more likely to re them and hence less likely to commit Type I error At the same time, we may be ring good managers who are outperforming the benchmark but yet not have statistically signi cant excess returns We are thus more likely to commit Type II error as Type II error is ring a superior manager w (Study Session 19, Module 36.8, LOS 36.t) Related Material SchweserNotes - Book Question #7 of 170 Which of the following is least likely to be a step in the construction of a custom security-based benchmark? A) Calculate the historical mean and standard deviation for the benchmark https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 4/119 10/12/2018 Learning Management System B) Identify the manager’s investment process C) Use the same weights for the benchmark as the manager Explanation Although calculating the historical mean and standard deviation for the benchmark is something that many portfolio managers will do, it is not speci ed as one of the steps in the construction of a custom security-based benchmark (Study Session 19, Module 36.3, LOS 36.g) Related Material en tre in SchweserNotes - Book Question #8 of 170 Which of the following is NOT required for macro performance attribution? B) Tactical asset allocations bo ok c A) Fund returns, valuations, and external cash ows C) Benchmark portfolio returns Explanation m There are three main inputs into the macro attribution approach: w w o policy allocations benchmark portfolio returns and fund returns, valuations and external cash ows (Study Session 19, Module 36.3, LOS 36.k) w Related Material SchweserNotes - Book Question #9 of 170 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 5/119 10/12/2018 Learning Management System An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index over the same time period Equity Fund S&P 500 Return 32% 26% Standard Deviation 41% 29% Beta 0.98 1.00 Risk-free rate is 6.00% in The di erence between the Sharpe ratio for the equity fund and the Sharpe ratio for the S&P 500 is the: en tre A) S&P 500 is 0.09 higher B) equity fund is 0.06 lower C) S&P 500 is 0.04 lower bo ok c Explanation The equity fund Sharpe ratio: (0.32 – 0.06)/0.41 = 0.63 The S&P 500 Sharpe ratio: (0.26 – 0.06)/0.29 = 0.69 m The equity fund is (0.63 – 0.69) = -0.06 lower Related Material o (Study Session 19, Module 36.7, LOS 36.p) w w w SchweserNotes - Book Question #10 of 170 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 6/119 10/12/2018 Learning Management System An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index over the same time period Equity Fund S&P 500 Return 13% 10.5% Standard Deviation 22% 20% Beta 1.21 1.00 Risk-free rate is 5.25% The Treynor measure for the equity fund is: B) 0.570 C) 0.064 Explanation bo ok c (0.13 – 0.0525)/1.21 = 0.064 en tre in A) 0.048 (Study Session 19, Module 36.7, LOS 36.p) Related Material o m SchweserNotes - Book w w Question #11 of 170 Which of the following statements about style indexes is least accurate? w A) They are widely available, widely understood and widely accepted B) Some style indexes can contain weightings in certain securities and/or sectors that may be larger than considered prudent C) They help fund sponsors better understand a manager’s investment style, by capturing factor exposures Explanation Helping fund sponsors better understand a manager's investment style, by capturing factor exposures is an advantage of factor models and not style indexes The other statements are true in the context of style indexes (Study Session 19, Module 36.3, LOS 36.f) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 7/119 10/12/2018 Learning Management System Related Material SchweserNotes - Book Question #12 of 170 Which of the following best describes the use of quality control charts in portfolio management? Quality control charts are used to determine if a manager has: A) strayed from their stated style .in B) statistically signi cant excess returns en tre C) substantial excess returns Explanation bo ok c In portfolio management, quality control charts are used to determine if a manager has statistically signi cant excess returns The manager's returns versus a benchmark are plotted on a graph where time is on the x-axis and value-added (excess) return is plotted on the yaxis A dence interval is formed around the x-axis of zero If the manager's returns plot outside the dence interval, we conclude that the manager has generated statistically signi cant excess returns (Study Session 19, Module 36.8, LOS 36.r) w w o SchweserNotes - Book m Related Material Markus Smith, CFA, is looking at di erent measures of risk for bond portfolios as well as stock w and bond mutual funds He has several projects currently underway Smith's rst project is to decompose the various sources of return for the BBB Bond Fund (BBB) which yielded a return of 12% The actual treasury yield was 8%, which is 1.0% better than the expected yield of 7.0% In addition, Smith has ascertained that the BBB portfolio bene ted by 0.50% due to maturity management and 1.25% from spread/quality management Smith's second project involves AAA Bond Fund (AAA) Smith gathers the following data: Actual AAA portfolio return = 10% (duration of portfolio = 10 years) Lehman Brothers Benchmark Index return = 8% (duration of portfolio = years) According to the bond market line (BML), the return for a portfolio with a10-year duration should be 9% https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 8/119 10/12/2018 Learning Management System The AAA Bond Fund's long-term strategic portfolio has a duration of years, and a target return of 8.5% Smith now turns his attention towards his third project, Star Equity Fund The table below details relevant information: Star Fund Weights Star Fund Returns Benchmark Returns Stocks 0.95 12% 14% Cash 0.05 4% 5% Asset Class in Overall Star Fund return = 11.60% en tre Overall benchmark return = 13.82% Smith's last project is for the Plumb America Index Fund S & P 500 22% 18% bo ok c Return Plumb America Standard Deviation 22% 1.2 1.0 m Beta 30% o Question #13 of 170 Fund? w w Assuming a risk-free rate of 5%, what is the Treynor measure for the Plumb America Index w A) +0.2716 B) +0.1417 C) -0.1714 Explanation Treynor's measure = (Return – risk free rate) / beta = (0.22 − 0.05) / 1.2 = 0.1417 (Study Session 19, Module 36.7, LOS 36.p) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 9/119 10/12/2018 Learning Management System Question #14 of 170 Assuming a risk-free rate of 5%, what is the Sharpe ratio for the Plumb America Index Fund? A) -0.5776 B) +0.6716 C) +0.5667 Explanation Sharpe ratio = (Return – risk free rate) / std deviation = (0.22 − 0.05) / 0.30 = 0.5667 in (Study Session 19, Module 36.7, LOS 36.p) Related Material bo ok c Question #15 of 170 en tre SchweserNotes - Book The ratio of return to systematic risk for an investment portfolio is 0.70, while the market is 0.50 This information suggests that the portfolio: A) exhibits inferior performance because it has more risk than the market .o the market m B) exhibits superior performance because the return per unit of risk is above that of w w C) is not diversi ed enough, and more securities should be purchased to bring the portfolio in line with the market w Explanation Risk-averse investors prefer a portfolio with a higher ratio of return to systematic risk to a portfolio with a lower ratio In this case, we can also say that the portfolio would plot above the SML since the portfolio's ratio is above that of the market Since portfolios that plot above the SML are undervalued, they are likely to provide an above average return Note: The ratio (Treynor's Measure) implicitly assumes a diversi ed portfolio, hence the use of beta (or systematic risk) in the denominator (Study Session 19, Module 36.7, LOS 36.p) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 10/119 10/12/2018 Learning Management System Expected treasury yield = 7.50% Unexpected treasury yield = 0.50% Return from sector allocation = 0.50% Return from allocation/selection interaction = 0.25% Return attributable to within-sector selection = 1.25% (can be backed out given the other information) Total return = 10.0% (Study Session 19, Module 36.3, LOS 36.l) in Related Material en tre SchweserNotes - Book bo ok c Question #150 of 170 The money-weighted return measures the: A) total return during the period B) return per unit of domestic currency .o Explanation m C) return on the average investment during the period w w The money-weighted return measures the return on the average investment during a speci c time period The money-weighted return computation uses the concept of an internal rate of return w (Study Session 19, Module 36.1, LOS 36.c) Related Material SchweserNotes - Book Question #151 of 170 Value added return is de ned as the: A) portfolio return minus the benchmark return https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 105/119 10/12/2018 Learning Management System B) portfolio return in excess of the return predicted based on the Capital Asset Pricing Model C) fund return minus the risk-free rate of return Explanation Value added return = Portfolio return – Benchmark return (Study Session 19, Module 36.3, LOS 36.l) Related Material Question #152 of 170 en tre in SchweserNotes - Book An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index over the same time period S&P 500 bo ok c Equity Fund Return Standard Deviation -16% 15% 19% 1.18 1.00 m Beta -12% o Risk-free rate is 6.00% w w The di erence between the Treynor measure for the equity fund and the Treynor measure for the S&P 500 is: w A) 0.15 B) 0.07 C) 0.17 Explanation The equity fund: (-0.12 – 0.06)/1.18 = -0.15 The S&P 500: (-0.16 – 0.06)/1.00 = -0.22 The equity fund is (-0.15 – (-0.22) = 0.07 higher (Study Session 19, Module 36.7, LOS 36.p) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 106/119 10/12/2018 Learning Management System Question #153 of 170 Which of the following would be least appropriate in macro performance evaluation? A) A benchmark return is calculated as a weighted average of the individual managers' benchmark returns B) External cash ows would be used to determine the impact of the sponsor’s decision making C) Market indices would be used for manager styles .in Explanation (Study Session 19, Module 36.3, LOS 36.k) SchweserNotes - Book m Question #154 of 170 bo ok c Related Material en tre Broad market indices would be used for asset categories Narrow indices would be used for manager's investment styles .o The following are a number of contributions to return for a xed-income portfolio: w w Return on interest rate management Return on trading activity Return due to changes in forward rates w Return on the default-free benchmark Which of the above statements is (are) CORRECT? E ect of External Interest Environment Contribution of the Management Process A) and and B) 1, and C) and and https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 107/119 10/12/2018 Learning Management System Explanation Changes in forward rates and the return on the default free benchmark are outside of the manager's in uence and are therefore part of the external interest environment Interest rate management and trading activity are an integral part of the role of the manager and are therefore part of the management process Remember we could also include return from sector/quality management and return from the selection of speci c securities (Study Session 19, Module 36.6, LOS 36.n) Related Material SchweserNotes - Book in Bill Carter, CFA and Bob Walters, CFA are analyzing the recent return of several funds they have the table below Fund B Fund C Fund D Market Return 7.80% 7.20% 8.20% 7.60% 7.00% Beta 1.10 0.90 1.20 1.05 1.00 Return Std.Dev 4.00% 3.44% 4.15% 3.50% 3.55% Tracking Error* 0.82% 0.45% 1.02% 0.67% bo ok c Fund A en tre been assigned to manage The funds are Fund A, Fund B, Fund C, and Fund D as indicated in o Market Index Return m *Tracking error is the standard deviation of the di erence between the Fund Return and the w w The risk-free rate of return for the relevant period was 3.5% The management of the rm that Carter and Walters works for is very proud of the fact that all w of the four funds had a higher return than the overall market as indicated on the table The rm's management wants to advertise how, using the market as a benchmark, these funds have had returns higher than that benchmark The rm's management asks Carter and Walters to compute several performance measures such as the Treynor measure, the Sharpe ratio, and the M2 measure The rm's management also asks for the construction of quality control charts In going over the results, Carter is skeptical of the results and using the market as a benchmark because that benchmark was not speci ed in advance Walters says that he is skeptical too because it is not clear if the market is an appropriate benchmark in all cases They want to proceed cautiously because the rm's management recently instituted policies for manager continuation For each manager, the rm's management has set up the null hypothesis that a https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 108/119 10/12/2018 Learning Management System manager has no skill and the alternative hypothesis is that the manager has skill in adding value Carter and Walters discuss constructing a custom benchmark for some of these or other funds they might manage A few of these funds hold cash positions to take advantage of good investment opportunities when they arise Carter says that the benchmark they construct should include cash in the weighting scheme They set aside a few weeks to construct a preliminary benchmark for several funds Walters wants to be thorough, because once they construct the benchmark, he doesn't plan to make any modi cations to the custom benchmark .in Question #155 of 170 en tre The portfolio with the highest Sharpe ratio is: A) Fund D B) Fund A Explanation bo ok c C) Fund C The formula for the Sharpe ratio is: where: σP o SP = m ⎯⎯⎯ ⎯⎯⎯ R P −R F = average portfolio return ⎯⎯⎯ RF = average risk-free return w w ⎯⎯⎯ RP = standard deviation of portfolio returns w σP For funds A, B, C, and D, the respective Sharpe ratios are 1.075, 1.076, 1.134, and 1.171 Fund D is the highest calculated as: (7.6 − 3.5)/3.5 = 4.1/3.5 = 1.171 (Study Session 19, Module 36.7, LOS 36.p) Related Material SchweserNotes - Book Question #156 of 170 What is the M2 measure for fund D? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 109/119 10/12/2018 Learning Management System A) 6.76% B) 11.26% C) 7.66% Explanation The formula for the M2 measure is: R P −R F MP = R F + ( σP σM ) in where: = average portfolio (account) return RF = average risk-free return σP = standard deviation of portfolio (account) returns σM = en tre RP standard deviation of the market index M2Portfolio D = 7.659% = 3.5% + (7.6% − 3.5%) × (3.55%/3.5%) bo ok c (Study Session 19, Module 36.7, LOS 36.p) Related Material m SchweserNotes - Book o Question #157 of 170 w w If the returns of each fund were plotted over a quality control chart using the market as a benchmark, the nal point of the value-added line would be above zero, i.e., above the w horizontal axis for: A) all of the funds except C only B) none of the funds C) all of the funds Explanation Since all of the funds' returns are higher than the benchmark for the period, all of the funds would have a positive end point for the cumulative value-added line (Study Session 19, Module 36.7, LOS 36.p) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 110/119 10/12/2018 Learning Management System Question #158 of 170 With respect to the reasons for Carter and Walters being skeptical of using the market as a benchmark: A) both Carter and Walters are wrong B) both Carter and Walters are correct C) Carter is wrong and Walters is correct .in Explanation (Study Session 19, Module 36.7, LOS 36.p) Related Material Question #159 of 170 bo ok c SchweserNotes - Book en tre Their objections are both justi ed A benchmark should be speci ed in advance and deemed appropriate for the style of the fund m With respect to the considerations that Carter and Walters put into preparing a custom o benchmark, including a weighting for cash and not making modi cations: w w A) Carter and Walters are both correct B) Carter is correct and Walters is wrong w C) Carter is wrong and Walters is correct Explanation Carter is correct in that a custom benchmark should include an appropriate weight for cash holdings Walters is wrong in that a benchmark should be modi ed on a preset schedule (Study Session 19, Module 36.7, LOS 36.p) Related Material SchweserNotes - Book Question #160 of 170 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 111/119 10/12/2018 Learning Management System The rm that Carter and Walters work for have set up a null hypothesis for each manager In such a case, the rm would make a type II error if it: A) keeps an unskilled manager B) hires a second manager to help a doubtful manager C) res a skilled manager Explanation In this case, we assume a manager does not add value and try to gather information that the manager does Without su cient evidence to prove value is added, the manager would be red Random noise could lead to this conclusion even though the manager does add value .in (Study Session 19, Module 36.7, LOS 36.p) Related Material bo ok c Question #161 of 170 en tre SchweserNotes - Book Accounts that contain illiquid assets present additional problems of accurately measuring return Which of the following statements would NOT be regarded as a problem associated m directly with illiquid assets? o A) Account valuations use trade date accounting as opposed to settlement accounting w w B) Matrix pricing is used C) Assets are carried at the price of the last trade w Explanation The use of trade date accounting is regarded to be a key feature of a good return measurement process The other options are examples of the problems caused when illiquid assets are included in the account Matrix pricing is using the quoted price of a similar asset as a proxy for the market value of thinly traded xed income securities (Study Session 19, Module 36.2, LOS 36.d) Related Material SchweserNotes - Book Question #162 of 170 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 112/119 10/12/2018 Learning Management System Which of the following statements about fund performance is CORRECT? A) When analyzing the performance of a bond portfolio the manager should be evaluated relative to a style universe Focusing on maturity ranges or a particular k i f h d l i B) A fund had total excess return of 1.82% Of the total, 1.60% was due to the style of the fund that was speci ed by the sponsor, and 0.22% was due to security l i h f h h h ld b di d h f d C) An equity fund had a return over the past year of 17% and a standard deviation of returns of 12% During this period the risk-free return was 3% The Sharpe ratio for h f d Explanation in The Sharpe ratio = (0.17 – 0.03)0.12 = 1.17 (Study Session 19, Module 36.7, LOS 36.p) SchweserNotes - Book m Question #163 of 170 bo ok c Related Material en tre Note that focusing on maturity ranges or a particular market segment are de nitions of style for a bond portfolio manager Also, managers whose styles are speci ed for them should only get credit for the excess return that is due to security selection .o The Campbell account is $5,000,000 at the beginning of January and $5,200,000 at the end of w w the month During the month a contribution of $60,000 was received What would be the rate of return on the account if the contribution was received on January 1, what would it be if the w contribution was received on January 31? January January 31 A) 2.77% 4.00% B) 4.00% 2.80% C) 2.77% 2.80% Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 113/119 10/12/2018 Learning Management System If the receipt was at the beginning of the period then: $5,200,000 - ($5,000,000 + $60,000) rt  =  $5,000,000 + $60,000  = 2.77% If the receipt was at the end of the period then: ($5,200,000 - $60,000) - $5,000,000 rt  =   = 2.8% $5,000,000 (Study Session 19, Module 36.1, LOS 36.b) Related Material Question #164 of 170 en tre in SchweserNotes - Book Given the following data, how is the manager's performance most accurately characterized? 5.2% Benchmark Return bo ok c Manager's Return 6.3% Market Index Return 4.3% m A) The manager earned an excess return from style but not from active management .o B) The manager earned an excess return from active management but not from style w w C) The manager earned an excess return from style and active management Explanation w The manager earned a return from style, where the style return is the benchmark return minus the market return (6.30% − 4.30% = 2.00%) The manager did not earn a return from active management, where the active return is the manager's return minus the benchmark return (5.20% − 6.30% = -1.10%) (Study Session 19, Module 36.2, LOS 36.e) Related Material SchweserNotes - Book Question #165 of 170 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 114/119 10/12/2018 Learning Management System One of the properties of a valid benchmark is that it be re ective of current investment opinion Which of the following is the most accurate explanation of this property? A) The manager should accept the applicability of the benchmark B) The securities in the benchmark should be those favored by a majority of analysts C) The manager should have knowledge of the securities in the benchmark Explanation in The property that a benchmark should be re ective of current investment opinion refers to the fact that the manager should have knowledge and expertise of the securities in the benchmark That the manager should accept the applicability of the benchmark refers to the accountable property of a valid benchmark (Study Session 19, Module 36.3, LOS 36.f) en tre Related Material Question #166 of 170 bo ok c SchweserNotes - Book Which of the following statements with regard to tests of benchmark quality is CORRECT? m A) An account’s exposure to systematic risk should be similar to those of the o benchmark at all times B) Tracking error is de ned as the variance of the excess returns earned due to active w w management C) An active position is the di erence between the weight of a security in the managed w portfolio versus the benchmark Explanation Tracking error is de ned by standard deviation not variance Exposure to systematic risk does not need to be the same at all times rather it should average that of the benchmark The correct statement is the one in relation to active positions (Study Session 19, Module 36.3, LOS 36.i) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 115/119 10/12/2018 Learning Management System Question #167 of 170 Which of the following statements regarding attribution analysis, benchmarks, and evaluating portfolio managers is CORRECT? A) Benchmark error is nonexistent with the Treynor measure B) Attribution analysis separates a portfolio manager's performance into an allocation e ect and a selection e ect C) Attribution analysis for bonds is virtually impossible Explanation (Study Session 19, Module 36.3, LOS 36.l) Related Material Question #168 of 170 bo ok c SchweserNotes - Book en tre in Attribution analysis can be done with bonds as it is with equities The only di erence is the categories of attribution Benchmark error is very much a part of the Treynor measure, as it uses beta as its risk measure m A portfolio manager has a well diversi ed portfolio and they are trying to determine whether or o not to add a particular stock to the portfolio to increase the portfolio's overall risk adjusted return To decide whether or not to add the stock the manager will back test the portfolio w w based on historical data of the stock and the portfolio The relevant measure to use in comparing the results of the back tested model comparing the results of the portfolio before w and after the addition of the stock would be the: A) Sharpe ratio B) Treynor measure C) Information ratio Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 116/119 10/12/2018 Learning Management System The equations for the measures are as follows: Treynor measure = (RP − RF) / βP Sharpe ratio = (RP − RF) / σP Information ratio = (RP − RB) / (σP − B) (Study Session 19, Module 36.7, LOS 36.q) bo ok c Related Material en tre in The goal is to add a greater return to the portfolio without appreciably increasing the level of risk Since the portfolio is already well diversi ed most of its risk is related to systematic risk (beta) which is the relevant measure of risk in the denominator of the Treynor measure Adding one risky stock to an already diversi ed portfolio will not appreciably change the overall risk of the portfolio thus beta and the Treynor measure remain the relevant measures used to compare the results of the portfolio with and without the addition of the stock The Sharpe ratio uses standard deviation in the denominator of the equation Standard deviation is comprised of systematic risk (beta) and unsystematic risk If the portfolio was not well diversi ed then most of the risk would be unsystematic or company speci c risk Adding one stock to an undiversi ed portfolio would most likely still leave a lot of unsystematic risk thus making standard deviation and the Sharpe ratio the relevant measures if the portfolio was undiversi ed The information ratio is used to compare the return to a benchmark which is not a concern to the portfolio manager in this question m SchweserNotes - Book o Question #169 of 170 When constructing a quality control chart which of the following is an important assumption w w that is made about the distribution of the manager's value added returns? A) Value-added returns are independent from period to period and normally w distributed B) The null hypothesis states that the expected value-added return is the risk free rate of return C) The investment process is consistent thus ensuring that a high degree of the error term in one period can be explained by the error term in the previous period Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 117/119 10/12/2018 Learning Management System The null hypothesis states that the expected value-added return is zero We are testing the manager's ability to generate positive expected value added returns We want a consistent process to ensure that the distribution of value added returns about their mean is constant We indeed assume that value-added returns are independent from one period to the next and normally distributed (Study Session 19, Module 36.8, LOS 36.r) Related Material SchweserNotes - Book in Question #170 of 170 en tre The results of a macro performance attribution analysis of a fund is listed below Fund Value Beginning value $100,000 100,000 Risk-free asset bo ok c Net contributions 101,000 Asset category 108,000 Benchmarks 109,000 o Allocation e ects m Investment strategies 110,000 112,000 w w Had the manager only engaged in a pure index approach, instead of 12%, the return of the fund would have been: w A) 10% B) 8% C) 9% Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 118/119 10/12/2018 Learning Management System Return = 8% = ($108,000 − $100,000)/$100,000 The Asset Category investment strategy assumes that the Fund's beginning value and external cash ows are invested passively in a combination of the designated asset category benchmarks, with the speci c allocation to each benchmark based on the fund sponsor's policy allocation to those asset categories In essence, this approach is a pure index fund approach The asset category corresponds to a pure index approach The dollar return would have been $8,000 or 8% on the initial $100,000 (Study Session 19, Module 36.3, LOS 36.l) Related Material w w w o m bo ok c en tre in SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448547/print 119/119 ... = [(0.5)(9.85 − 8.64)] + [(0 .33 3)(5 .34 − 5.92)] + [(0.167)(2 .38 − 2.47)] = 0 .39 7% Related Material w w o SchweserNotes - Book m (Study Session 19, Module 36 .3, LOS 36 .l) w Question #21 of 170... ((0 .30 −0 .35 ) × (12−14.7)) + ((0.20−0.25) × (18−14.7))] = [0. 03 + 0. 135 − 0.165] = 0.0% (Study Session 19, Module 36 .3, LOS 36 .l) Related Material en tre in SchweserNotes - Book Question # 53 of... indexes (Study Session 19, Module 36 .3, LOS 36 .f) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 48547/print 7/119 10/12/2018