Questions 43-48 relate to Risk Management and Performance Evaluation.
Jack Mercer and June Seagram are investment advisors for Northern Advisors. Northern
provides investment advice for pension funds, foundations, endowments, and trusts. As part
of their services, they evaluate the performance of outside portfolio managers. They are
currently scrutinizing the performance of several portfolio managers who work for the
Thompson University endowment.
Over the most recent month, the record of the largest manager, Bison Management, is as
follows. On March 1, the endowment account with Bison stood at $11,200,000. On March
16, the university contributed $4 million that they received from a wealthy alumnus. After
receiving that contribution, the account was valued at $17,800,000. On March 31, the account
was valued at $16,100,000. They also make a series of statements:
Statement 1: Seagram says the March money-weighted return will be greater
than the time-weighted return for the account.
Statement 2: Mercer states that the advantage of the time-weighted return
versus money-weighted return is easy to calculate and structurally
easy to administer.
Statement 3: Seagram states that the money-weighted return is a better
measure of the manager's performance.
Mercer and Seagram are also evaluating the performance of Lunar Management. Risk and
return data for the most recent fiscal year are shown here for both Bison and Lunar. The
minimum acceptable return (MAR) for Thompson is the 4.5% spending rate on the
endowment, which the endowment has determined using a geometric spending rule. The T-
bill return over the same fiscal year was 3.5%. The return on the MSCI World Index is used
as the market index. The World Index had a return of 9% in dollar terms with a standard
deviation of 23% and a beta of 1.0.
Bison Lunar
Return 14.1% 15.8%
Standard deviation 31.5% 30.7%
Beta 0.9 1.3
Standard deviation of returns below the MAR 30.1% 30.9%
The next day at lunch, Mercer and Seagram discuss alternatives for benchmarks in assessing
the performance of managers.
Statement 4: Mercer states that indexes are often used as benchmarks and
benefit the client but not the manager.
Statement 5: Seagram states that in order to be useful in performance
attribution, the benchmark must be relevant to the account. That
means marketable indexes cannot be used for some clients.
Mercer and Seagram also provide investment advice for a hedge fund, Jaguar Investors.
Jaguar specializes in exploiting mispricing in equities and over-the-counter derivatives in
emerging markets. Jaguar will periodically provide foreign currency hedges to higher quality,
small firms in emerging markets when deemed profitable. This most commonly occurs when
no other provider of these contracts is available to these firms. Jaguar is currently selling a
large position in Mexican pesos in the spot market. Furthermore, they have just provided a
forward contract to a firm in Russia that allows that firm to sell Swiss francs for Russian
rubles in 90 days. Jaguar has also entered into a currency swap that allows a firm to receive
Japanese yen in exchange for paying the Russian ruble. Because there are often multiple
transactions with a single party, net settlements are specified.
...
Calculate the time-weighted return for Bison during March and determine the validity of
Statement 1.
Time-weighted Statement 1
A) 5.9% Correct
B) 11.4% Correct
C) 11.4% Incorrect
Question #44 of 60
Statements 2 and 3 are:
Statement 2 Statement 3
A) Correct Incorrect
B) Correct Correct
C) Incorrect Incorrect
Question #45 of 60
The M-squared measure for the Bison fund is closest to:
A) 2.2%.
B) 6.4%.
C) 11.2%.
Question #46 of 60
Mercer and Seagram agree the Sortino ratio is an appropriate method of considering
downside risk. Considering that assumption and the other information provided, determine
which of the following best describes the risk-adjusted performance of the Bison portfolio
and Lunar portfolio.
A) The Lunar portfolio is better diversified and, from a downside risk perspective, has superior
performance.
B) The Bison portfolio is better diversified but, from a downside risk perspective, the Lunar portfolio
has superior performance.
C) The Lunar portfolio is better diversified but, from a downside risk perspective, the Bison portfolio
Question #47 of 60
Statements 4 and 5 are:
Statement 4 Statement 5
C) Incorrect Correct
Question #48 of 60
Which of the following risks assumed by Jaguar was not explicitly considered?
A) Credit risk.
B) Herstatt risk.
C) Operations risk.
Question #49 of 60
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