Questions 55-60 relate to Performance Evaluation and Attribution.
Powerful Performance Presenters (PPP) is a performance attribution and evaluation firm for
pension consulting firms and has recently been hired by Stober and Robertson to conduct a
performance attribution analysis for TopTech. Tom Harrison and Wendy Powell are the
principals for PPP. Although performance attribution has come under fire lately because of its
shortcomings, Stober believes PPP provides a needed service to its clients. Robertson shares
Stober's view of performance attribution analysis.
Stober and Robertson request that Harrison and Powell provide a discussion of performance
measures. During a conversation on complements to attribution analysis, Harrison notes the
uses of the Treynor ratio. He states that the Treynor ratio is appropriate only when the
investor's portfolio is well diversified. Powell states that the Sharpe ratio is useful when you
want to find out how the systematic risk of the portfolio is affected when changing its asset
allocation.
Stober requests that PPP do some performance attribution calculations on TopTech's
managers. In order to facilitate the analysis, Stober provides the information in the following
table:
Weighting Return
Composite TopTech Benchmark TopTech Benchmark
Small-cap value 50% 60% 18.7% 28.6%
Large-cap value 30% 25% 15.8% 12.4%
Financials 20% 15% 12.5% 8.85%
Harrison states one of PPP's services is that it will determine whether TopTech uses valid
benchmarks to evaluate the performance of each of its managers. Stober use the performance
of the top 10th percentile performance of a broad per group of managers. Stober states that
this is a valid benchmark because it is:
Unambiguous: We inform the managers of this approach so that the managers can verify
the securities and security weights of the benchmark they will be compared with.
Specified in advance: We have and will not change this policy without prior notification.
During a presentation to Stober, Robertson, and other TopTech executives, Harrison and
Powell describe how macro attribution analysis can decompose an entire fund's excess
returns into various levels. In his introduction, Robertson delineates the six levels as net
contributions, risk-free return, asset categories, benchmarks, investment managers, and
allocations effects.
Robertson states that TopTech has performed impressively at the investment managers level
for three years in a row. Harrison and Powell then describe the levels in greater detail.
Harrison describes the benchmark level as the difference between active managers' returns
and their benchmark returns. Powell states that the investment managers' level reflects the
returns to active management on the part of the fund's managers, weighted by the amount
actually allocated to each manager.
At the request of Stober, Harrison and Powell explore alternatives to the benchmark TopTech
is currently using for its small-cap value manager. After some investigation of the small-cap
value manager's emphasis, Harrison and Powell derive four potential custom benchmarks and
calculate two measures to evaluate the benchmarks: (1) the return to the manager's active
management, or A = portfolio return - benchmark return; and (2) the return to the manager's
style, or S = benchmark return - broad market return.
The following characteristics are presented below for each benchmark:
(1) the beta between the benchmark and the small-cap value portfolio;
(2) the tracking error (i.e., the standard deviation of A); (3) the turnover of the benchmark;
and (4) the correlation between A and S.
Benchmark A Benchmark B Benchmark C
Beta 1.23 1.08 1.53
Tracking error 12% 10% 11%
Benchmark turnover 8% 7% 8%
Correlation between A and S 0.52 0.09 0.33
Harrison and Powell evaluate the benchmarks based on the four measures.
...
Regarding their statements concerning the Sharpe and the Treynor ratios, are Harrison and
Powell correct or incorrect?
A) Only Harrison is correct.
B) Only Powell is correct.
C) Both are incorrect.
Question #56 of 60
Based on an overall attribution analysis, does TopTech demonstrate superior ability to select
sectors?
A) No, the pure sector allocation effect is -1.8%.
B) Yes, the pure sector allocation effect is 1.8%.
C) Yes, the pure sector allocation effect is 3.2%.
Question #57 of 60
stocks?
A) No, the within-sector selection effect is -4.5%.
B) No, the within-sector selection effect is -3.2%.
C) Yes, the within-sector selection effect is 1.3%.
Question #58 of 60
Stober asserts that the benchmark they use for manager permanence evaluation meets two of
the characteristics of a valid benchmark. Are these assertions correct or not?
A) Neither is correct.
B) Both are correct.
C) Only the assertion of unambiguous is correct.
Question #59 of 60
Regarding their statements concerning macro attribution analysis, determine whether
Harrison and Powell are correct or incorrect.
C) Both Harrison and Powell are incorrect.
Question #60 of 60
Of the three benchmarks, determine which would be most appropriate for the small cap value
manager.
A) Benchmark A.
B) Benchmark B.
C) Benchmark C.
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