“EVALUATING PORTFOLIO PERFORMANCE,” CH 14, PP. 14-23 THROUGH 14-47,...

3. “Evaluating Portfolio Performance,” Ch 14, pp. 14-23 through 14-47, Peter Dietz and

Jeannette Kirschman, Managing Investment Portfolios: A Dynamic Process, 2nd edition,

John Maginn and Donald Tuttle, eds. (Warren, Gorham & Lamont, 1990)

Purpose:

To test the candidate’s ability to evaluate investment performance relative to an appropriate

benchmark.

LOS: The candidate should be able to

“Benchmark Portfolios and the Manager/Plan Sponsor Relationship” (Session 21)

• identify the characteristics of an effective benchmark portfolio and provide a critique of the

practice of using the performance of the median manager, rather than a benchmark portfolio, in

performance evaluation.

“Are Manager Universes Acceptable Performance Benchmarks?” (Session 21)

• evaluate the validity and appropriateness of using benchmarks as a standard for evaluating

manager or plan sponsor performance;

• explain the conceptual basis for valid benchmarks;

• explain how survivor bias significantly affects performance measurement results when median

manager returns rather than benchmark returns are used as the comparison standard.

Guideline Answer

A. Generally, the correct benchmark portfolio is one that both the investment manager and the

client agree fairly represents the manager’s investment process. To be valid and effective in

measuring a manager’s performance, a benchmark should be: