THROUGH 30 RELATE TO PERFORMANCE ATTRIBUTION. LANCASTER C...

Questions 25 through 30 relate to Performance Attribution. Lancaster Case Scenario Carol Lancaster of Trident Funds is discussing portfolio performance evaluation with a new employee, Mary Clark. Clark asks Lancaster why there is a preference for using a time-weighted rate of return (TWR) instead of a money-weighted rate of return (MWR). Lancaster informs Clark that MWR always has an upward bias relative TWR whenever the fund receives large contributions during a particular period. Consequently, TWR is the preferred metric. Clark also asks Lancaster about the strict appraisal criteria used to evaluate the different managers employed by the Fund. Lancaster states, “The Fund is willing to risk firing good managers, a Type II error, in order to prevent retaining poor managers, a Type I error. But I would prefer if the Fund would relax the appraisal criteria.” Lancaster then introduces Clark to a typical micro attribution model used by the Fund to evaluate a manager’s ability using the information in Exhibit 1. Exhibit 1 Micro Attribution Model Data Sector Benchmark Portfolio Economic Sector: Portfolio Return (%): Weight (%): Sector 1: 15 10 1.16 0.82 Sector 2: 25 25 1.69 2.31 Sector 3: 40 30 -0.62 -0.38 Sector 4: 14 15 4.98 2.95 Sector 5: 5 20 3.10 0.69 Cash: 1 0 0.45 --- Buy/hold Return: 1.21 1.13 Trading/other Costs: -0.04 0.00 Total Return: 1.17 1.13 The value-added return produced by the manager is segmented into: a pure sector allocation return, a within sector allocation return, and an allocation/selection interaction return. Lancaster states that each portion of the value-added return is examined, but that particular emphasis is placed upon the within sector allocation return because it strictly measures the manager’s ability to select securities. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose. 25. Lancaster’s statement about the money-weighted rate of return (MWR) is most likely: A. correct. B. incorrect, because the MWR is always equivalent to the time-weighted rate of return (TWR). C. incorrect, because the MWR can have downward and upward bias relative to the time-weighted rate of return (TWR). 26. If the Fund adopted Lancaster’s preferred appraisal criteria, the most likely impact would be an increase in: A. Type I error only. B. Type II error only. C. both types of errors. 27. The pure sector allocation return (%) for Sector 1 is closest to: A. -0.05. B. -0.02. C. 0.02. 28. The within sector allocation return (%) for Sector 3 is closest to: A. -0.10. B. -0.07. C. -0.02. 29. The allocation/selection interaction return (%) for Sector 5 is closest to: A. -0.36. B. -0.30. C. 0.48. 30. Lancaster’s statement about the within sector allocation return is most likely: B. incorrect, because only the manager’s portfolio weighting of securities within the sector is considered. C. incorrect, because the manager’s portfolio weighting and security selection within the sector are both considered.