CFA 2018 level 3 schweser practice exam CFA 2018 level 3 question bank 12 performance evaluation questions

QUESTION 2 IS COMPOSED OF THREE PARTS A, B, C FOR A TOTAL OF 9 MINUTES Alpha Consultants provides portfolio evaluation services for institutional investors throughout Canada and is curr

PERFORMANCE EVALUATION

QUESTION 1 IS COMPOSED OF THREE PARTS (A, B, C) FOR A TOTAL OF 12 MINUTES

Eugene Fenigore, CFA, and Barbara Mati, CFA, are responsible for overseeing the performance evaluation of a large government pension plan Fenigore and Mati are discussing the

performance of the plan’s assets during which Mati discusses the three components of micro performance attribution for equity investments

A State and explain the three components of micro attribution

(6 minutes)

Fenigore and Mati analyze Sharpe style weights from 2011–2014 (results of the analysis are contained in Table 1) GM’s average style fit over the 4-year period is 96%

Table 1: Returns-Based Style Analysis

Russell 1000 Large Cap Value Index 1 1 1 0

Russell 1000 Large Cap Growth Index 0 1 1 0

Russell 2000 Small Cap Value Index 2 1 0 1

Russell 2000 Small Cap Growth Index 97 97 98 99

Total 100 100 100 100

B Determine whether Gamma Managers is most likely utilizing an active or passive strategy

and support the determination with two reasons from the data provided

(3 minutes)

C Based on the returns-based style analysis output, discuss whether Gamma Managers is

meeting its mandated strategy

(3 minutes)

QUESTION 2 IS COMPOSED OF THREE PARTS (A, B, C) FOR A TOTAL OF 9

MINUTES

Alpha Consultants provides portfolio evaluation services for institutional investors throughout Canada and is currently evaluating performance for a large pension fund One of the fund’s managers, Empire Partners, has invested in four sectors of the economy as well as holding a cash position The weights in the various sectors, returns, and overall performance of the manager and the benchmark chosen by Alpha are shown in the following table

Table 1: Portfolio and Benchmark Sector Allocations

Sector Weight

Benchmark Sector Weight

Portfolio Sector Return

Benchmark Sector Return

Consumer

A Using the data in Table 1, calculate the Empire Partners manager’s pure sector allocation

return in the energy sector Show your work

(3 minutes)

B Using the data in Table 1, calculate the Empire Partners manager’s within-sector selection

return in the financial sector Show your work

(3 minutes)

C Using the data in Table 1, calculate the Empire Partners manager’s allocation/selection

interaction return in the agricultural sector Show your work

(3 minutes)

QUESTION 3 HAS TWO PARTS (A, B) FOR A TOTAL OF 10 MINUTES

Sal Holo and Che Back are discussing performance attribution analysis for the accounts they

manage Accounts E47 and E36 have the same objectives and investment style They should

have been managed the same way, and Back is surprised by the discrepancies in their recent

monthly returns The data is shown below:

Account: Time-weighted

return (TWR)

Money-weighted return (MWR)

For account E15, Holo has been struggling to find a suitable benchmark E15 is an actively

managed small cap growth portfolio The account mandate includes holding securities with an

average market cap of 25% or less and a beta 110% or more than those of the S&P 500

Back compiles the following analysis of three potential benchmarks He tells Holo to use this

analysis to test for a suitable benchmark

Characteristics:

Benchmark Archie Baker Charlie Beta from regression of monthly account to

benchmark returns

1.02 0.98 1.10

Standard deviation of alpha where alpha is account return minus benchmark return

5.1% 5.7% 9.7%

Noncoverage ratio: % of portfolio holdings that are not held in the benchmark

2% 4% 11%

A. Based on the monthly performance report, determine whether the two accounts were most

likely managed the same way and support your determination Discuss how external cash

B. Based on all the information, recommend the most appropriate benchmark for account E15

Explain two reasons it is the most suitable benchmark For each benchmark not selected, explain one reason it is not appropriate

(5 minutes)