CFA 2018 level 3 schweser practice exam CFA 2018 level 3 question bank 12 performance evaluationanswers

PERFORMANCE EVALUATION Answers Question 1 Part A  Pure sector allocation compares the sector weights of the portfolio to those of the benchmark.. Sample Scoring Key: 2 points for usin

PERFORMANCE EVALUATION

Answers

Question 1

Part A

 Pure sector allocation compares the sector weights of the portfolio to those of the benchmark

It captures value added only from sector weighting

 Within-sector selection compares the manager’s security selection return to those of the benchmark It captures only security selection value added

 Allocation/selection interaction combines over- and underweighting with security selection

by sector It is a joint or combined effect necessary to reconcile to total value added

Sample Scoring Key:

1 point each for the 3 components and 1 point for explaining each

Part B

Passive

 The high style fit (R2

) of 96% indicates only 4% is not explained by the index’s returns

 97–99% is consistently due to small cap growth index returns, making passive replication easy

Sample Scoring Key:

1 point for each of the three required items

Part C

They are not See part B They are implementing SC growth, but the data indicates a passive, not active, approach as assigned

Sample Scoring Key:

1 point for “no” and 2 for the discussion of why

Question 2

Part A

(.31 − 35) × (−3.00% − 0.75%) = 0.150%

Sample Scoring Key:

2 points for using the correct weights and percentage returns

1 point for the correct answer

Part B

.23 × (5.30% − 6.00%) = −0.161%

Sample Scoring Key:

2 points for using the correct weights and percentage returns

1 point for the correct answer

Part C

(.24 − 28) × (2.9% − 1.0%) = −0.076%

Sample Scoring Key:

2 points for using the correct weights and percentage returns

1 point for the correct answer

Question 3

Part A

The time-weighted returns of the accounts are virtually the same, indicating the underlying manager returns and account management were the same

E47’s TWR and MWR are equal, suggesting the account had no ECFs

The difference in E36’s TWR and MWR is consistent with volatility of return within the month and could be explained by either: (1) account contributions came in following higher and before lower within the month return, or (2) account withdrawals occurred following lower and before higher within the month return

Sample Scoring Key:

One point each for: determining the accounts were most likely managed the same way, using the comparable time-weighted returns to support the determination, E47 likely had no ECFs, E36 did have ECFs due to the difference between the TWR and MWR, and any correct discussion of how ECFs could lead E36’s MWR to be below its TWR

Candidate discussion: This question tests an understanding of TWR versus MWR But instead

of just calculating, you must infer what likely led to the output The 5 minutes and direction that

“simply stating ECFs can cause differences in TWR and MWR receives no credit” is sufficient

direction to go into detail Each point made in the sample answer comes from the taught material and case facts, and is relevant to the question asked You can vary the phrasing, but assume that for each element you did not cover, your score goes down one point You had what you needed

to answer the question

Part B

Use Baker:

 Meets the mandate of at least a 1.10 beta

 Has minimal systematic bias The 0.98 regression beta shows benchmark and portfolio returns track closely

 Has low tracking error at 5.7%, again indicating benchmark and portfolio returns track

closely

 Has a high coverage ratio (100% – 4%), indicating it represents the securities used in the portfolio

Archie is not appropriate 0.99 beta does not meet the mandate of 110% or greater exposure to market systematic risk (The beta needs to be 1.10 or greater.)

Charlie results in high systematic bias with a 1.10 regression beta of portfolio returns to the benchmark

Sample Scoring Key:

One point for selecting Baker One point each for two reasons supporting Baker, and one point each for a reason to reject Alpha and Charlie

Candidate discussion: The question applies tests of benchmark quality and account objectives The 10% (or more) higher beta mandate versus the S&P implies a beta of 1.10 or more There is

no data to deal with the market cap mandate The beta from regressing portfolio to benchmark returns determines style fit Approaching 1.0 indicates minimal systematic bias A lower tracking error (volatility of alpha) and higher coverage (low noncoverage) also indicate a good

benchmark fit to the portfolio Other reasons to reject Charlie are the low coverage ratio (high noncoverage) and large tracking error Be careful to make your reasons different when two or more are requested For example, selecting Baker based on its appropriate beta of at least 1.10 gets credit, but then you cannot reject Archie because it’s beta is 0.99 Expect that to be treated

as a separate reason

All the benchmark turnovers are low, and high turnover would only be an issue for a passive

(match the benchmark) objective Benchmark standard deviation by itself is not a relevant factor