THROUGH 24 RELATE TO PERFORMANCE EVALUATION AND ATTRIBUTI...
Questions 19 through 24 relate to Performance Evaluation and Attribution.
Brian Hogan Case Scenario
Brian Hogan is an equity portfolio manager at GreenDeals Investment Management
(GDIM), an asset management firm in USA. Every quarter, Hogan hires a financial
consultant to perform a thorough analysis of the portfolio holdings of his clients’
accounts. For the next four quarters, Hogan hired Joseph Riso, a financial analyst and an
expert in performing portfolio evaluations and measuring returns. While talking about
appropriate benchmark construction during an introductory meeting with Hogan, Riso
made the following comments:
Statement 1: “At the investment manager level, a number of different types of
benchmarks can satisfy the criteria for an acceptable benchmark. Of these
types, the custom security benchmark is the one that meets all of the
required benchmark properties and satisfies all of the benchmark validity
criteria.”
Statement 2: “Broad market indexes as benchmarks are unambiguous. However, style
indexes and factor model based benchmarks can be ambiguous and thus,
are sometimes not appropriate to serve as benchmarks.”
After the meeting, Riso was assigned the task of analyzing the quality of the benchmark
for an institutional fund worth $10 million and a private wealth account worth $7 million.
The institutional fund constitutes mostly of large-cap value stocks, both domestic and
international. During his analysis of the fund’s benchmark, Riso gathered the following
information:
1.
When large-cap growth stocks outperformed the market as a whole, the fund
produced a positive excess return relative to its benchmark.
2.
When large-cap growth stocks underperformed the market as a whole, the fund
outperformed the market but the benchmark underperformed the market.
Riso then proceeded towards evaluating the benchmark quality of the private wealth
account, owned by Kellie James, a practicing physician in a community hospital. The
account has a stated investment mandate that permits active management using long
positions only. As part of his evaluation process, Riso gathered the following
1.
The historical beta of the account relative to the benchmark equaled 1.02.
2.
The tracking error of the account relative to the benchmark was 15% and the
tracking error of the account relative to the market index was 17%.
3.
Over the past month, the risk exposures of the benchmark were significantly
greater than the risk exposures of the managed account.
4.
The ratio of negative active positions to positive active positions was 1.5.
Hogan is also responsible for heading a portfolio management team for a large pension
fund sponsored by Crest Enterprises (CE), a large firm operating in the industrial sector
of the U.S. economy. The financial committee at CE instructed Hogan to perform a
thorough evaluation of the performance of their pension assets for the month of June
2010. Hogan assigned this task to Riso and Andrew Ellerd, a financial analyst at GDIM
with considerable experience in performance evaluation of insititutional accounts. After a
comprehensive assessment and performing rigorous calculations, Riso and Ellerd came
up with numbers that helped them in determining the sources of the fund’s returns. A
portion of the results of their macro attribution analysis is provided in Exhibit 1.
Exhibit 1
Macro Attribution Analysis
Decision Making Levels
Returns
Aggregate manager investment style benchmarks
3.65%
Aggregate asset category benchmarks
3.76%
Aggregate actual return of the managers
3.81%
Allocation effects
0.00%
Ellerd is carrying out a micro attribution analysis of a portfolio owned by GDIM’s oldest
private wealth clients. Exhibit 2 displays some information Ellerd has put together to
assist him with his evaluation.
Exhibit 2
Sector
Economic
Portfolio
Benchmark
Sectors
Weight (%)
Return
Return (%)
Energy
12.17
11.55
1.23
1.34
Capital goods
7.94
6.34
–0.67
–0.98
Technology
22.56
20.56
2.10
0.50
*The overall benchmark return equaled 1.20%
19. Riso is most accurate with respect to:
A.
Statement 1 only.
B.
Statement 2 only.
C.
both statements 1 and 2.
20. With respect to the information Riso gathered about the institutional fund, which
of the following point(s) most likely indicates (indicate) that the benchmark is of
poor quality?
A.
Point 1 only.
B.
Point 2 only.
C.
Both points 1 and 2.
21. Which respect to the information Riso gathered about the private wealth account,
which of the following point(s) most likely indicates (indicate) that the benchmark
is of poor quality?
A.
Point 4 only.
B.
Points 3 and 4 only.
C.
Points 1 and 3 only.
22. Which of the following is least accurate about the performance of Crest
Enterprises’s pension account during June 2010?
A.
Fund sponsors invested in all of the managers and asset categories
precisely at the established policy allocations.
B.
During June 2010, the return due to style bias was positive.
C.
During June 2010, the managers’ active management decisions had a
positive impact on the change in the fund’s value.
23. Using Exhibit 2, for which of the economic sectors was the pure sector allocation
return the highest?
A.
Energy.
B.
Capital Goods.
C.
Technology.
24. Using Exhibit 2, for which of the economic sectors was the within-sector
allocation return the highest?