2019 CFA level 3 qbank reading 36 evaluating portfolio performance answers

Study Session 19, Module 36.3, LOS 36.j Related Material SchweserNotes - Book 5 Question #2 of 170 Which of the following measures would be the most appropriate one to use when comparing

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Question #1 of 170

With regard to the use of value added return in the measurement of hedge fund performance,

which of the following statements is most accurate?

A) Value added return is calculated as the di erence between the portfolio return,

given benchmark weightings, and the actual portfolio return

B) Value added return is simply the di erence between the portfolio return and the

benchmark return

C) Although weights sum to zero a return is calculated by summing the performance

impacts of the individual long positions

Explanation

To replicate a zero net asset hedge fund the weights must add to zero Calculation of return

is achieved by summing the individual long and short positions and the value added return is

the di erence between the portfolio return and the benchmark return

(Study Session 19, Module 36.3, LOS 36.j)

Related Material

SchweserNotes - Book 5

Which of the following measures would be the most appropriate one to use when comparing

the results of two portfolios in which each portfolio contains only a few number of stocks

representing a limited number of industries?

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The equations for the 3 measures are as follows:

Sharpe ratio = (RP − RF) / σPTreynor measure = (RP − RF) / βPInformation ratio = (RP − RB) / (σP − B)Since both portfolios are not well diversi ed most of their risk comes from unsystematic

(company speci c) risk and is not tied to the overall level of risk in the market thus in this

case standard deviation is the best measure of risk to use The Sharpe ratio is the best

measure to use to compare the two portfolios which are undiversi ed since the Sharpe ratio

uses standard deviation or total risk in the denominator of the equation as its measure of

risk The Treynor measure uses beta or systematic market risk as the measure of risk in the

denominator and the information ratio is best to use when comparing a portfolio to a

Frank Belanger would like to calculate the rate of return for an illiquid asset He states that he

will use matrix pricing to obtain a substitute for the security's current price Which of the

following most accurately describes matrix pricing? In matrix pricing, the analyst uses:

A) dealer quotes for similar securities.

B) the price from the last trade for the same security.

C) an average of recent prices.

Explanation

Matrix pricing is used when the asset is illiquid and a security price is not readily available In

matrix pricing, the analyst uses dealer quoted prices for similar securities

(Study Session 19, Module 36.2, LOS 36.d)

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Which of the following is the least likely to be an input into micro performance evaluation?

A) The sector return for the manager.

B) The return on the risk-free asset.

C) The weight of a sector in the benchmark.

Explanation

The return on the risk-free asset is not an input into micro performance evaluation but it

would be used as an input into macro performance evaluation

(Study Session 19, Module 36.3, LOS 36.k)

Bill Smith is evaluating the performance of four large-cap equity portfolios: Funds A, B, C and D

As part of his analysis, Smith computed the Sharpe ratio and the Treynor measure for all four

funds Based on his nding, the ranks assigned to the four funds are as follows:

Fund Treynor Measure Rank Sharpe Ratio Rank

The di erence in rankings for Funds A and D is most likely due to:

A) a lack of diversi cation in Fund A as compared to Fund D.

B) a di erence in risk premiums.

C) di erent benchmarks used to evaluate each fund’s performance.

Explanation

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The most likely reason for a di erence in ranking is due to the absence of diversi cation in

Fund A The Sharpe ratio measures excess return per unit of total risk, while the Treynor ratio

measures excess return per unit of systematic risk Since Fund A performed well on the

Treynor measure and so poorly on the Sharpe measure, it seems that the fund carries a

greater amount of unsystematic risk, meaning it is not well diversi ed and systematic risk is

not the relevant risk measure

(Study Session 19, Module 36.7, LOS 36.p)

Suppose that all of a rm's managers are outperforming the benchmark, some by a little, some

by a lot If the con dence intervals for a quality control charts in portfolio management were

widened, what would the most likely e ect be?

A) Type I error would become less likely and Type II error would become more likely.

B) Type I error would become more likely and Type II error would become less likely.

C) Type I error would become more likely and Type II error would become more likely.

Explanation

Type I error is retaining a poorly performing manager If the con dence intervals are widened

and a poor manager is barely outperforming the benchmark, it is less likely that they will

have statistically signi cant excess returns We are thus more likely to re them and hence

less likely to commit Type I error At the same time, we may be ring good managers who are

outperforming the benchmark but yet do not have statistically signi cant excess returns We

are thus more likely to commit Type II error as Type II error is ring a superior manager

(Study Session 19, Module 36.8, LOS 36.t)

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B) Identify the manager’s investment process.

C) Use the same weights for the benchmark as the manager.

Explanation

Although calculating the historical mean and standard deviation for the benchmark is

something that many portfolio managers will do, it is not speci ed as one of the steps in the

construction of a custom security-based benchmark

(Study Session 19, Module 36.3, LOS 36.g)

Which of the following is NOT required for macro performance attribution?

A) Fund returns, valuations, and external cash ows.

B) Tactical asset allocations.

C) Benchmark portfolio returns.

Explanation

There are three main inputs into the macro attribution approach:

1 policy allocations

2 benchmark portfolio returns and

3 fund returns, valuations and external cash ows

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An analyst has gathered the following information about the performance of an equity fund

and the S&P 500 index over the same time period

Equity Fund S&P 500

The equity fund Sharpe ratio: (0.32 – 0.06)/0.41 = 0.63

The S&P 500 Sharpe ratio: (0.26 – 0.06)/0.29 = 0.69

The equity fund is (0.63 – 0.69) = -0.06 lower

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and the S&P 500 index over the same time period

Equity Fund S&P 500

Which of the following statements about style indexes is least accurate?

A) They are widely available, widely understood and widely accepted.

B) Some style indexes can contain weightings in certain securities and/or sectors that

may be larger than considered prudent

C) They help fund sponsors better understand a manager’s investment style, by

capturing factor exposures

Explanation

Helping fund sponsors better understand a manager's investment style, by capturing factor

exposures is an advantage of factor models and not style indexes The other statements are

true in the context of style indexes

(Study Session 19, Module 36.3, LOS 36.f)

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Which of the following best describes the use of quality control charts in portfolio

management? Quality control charts are used to determine if a manager has:

A) strayed from their stated style.

B) statistically signi cant excess returns.

C) substantial excess returns.

Explanation

In portfolio management, quality control charts are used to determine if a manager has

statistically signi cant excess returns The manager's returns versus a benchmark are plotted

on a graph where time is on the x-axis and value-added (excess) return is plotted on the

y-axis A con dence interval is formed around the x-axis of zero If the manager's returns plot

outside the con dence interval, we conclude that the manager has generated statistically

signi cant excess returns

(Study Session 19, Module 36.8, LOS 36.r)

Markus Smith, CFA, is looking at di erent measures of risk for bond portfolios as well as stock

and bond mutual funds He has several projects currently underway

Smith's rst project is to decompose the various sources of return for the BBB Bond Fund (BBB)

which yielded a return of 12% The actual treasury yield was 8%, which is 1.0% better than the

expected yield of 7.0% In addition, Smith has ascertained that the BBB portfolio bene ted by

0.50% due to maturity management and 1.25% from spread/quality management

Smith's second project involves AAA Bond Fund (AAA) Smith gathers the following data:

Actual AAA portfolio return = 10% (duration of portfolio = 10 years)

Lehman Brothers Benchmark Index return = 8% (duration of portfolio = 8 years)

According to the bond market line (BML), the return for a portfolio with a10-yearduration should be 9%

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The AAA Bond Fund's long-term strategic portfolio has a duration of 9 years, and a targetreturn of 8.5%.

Smith now turns his attention towards his third project, Star Equity Fund The table below

details relevant information:

Asset Class Star Fund Weights Star Fund Returns Benchmark Returns

Overall Star Fund return = 11.60%

Overall benchmark return = 13.82%

Smith's last project is for the Plumb America Index Fund

Plumb America S & P 500

Treynor's measure = (Return – risk free rate) / beta = (0.22 − 0.05) / 1.2 = 0.1417

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Sharpe ratio = (Return – risk free rate) / std deviation = (0.22 − 0.05) / 0.30 = 0.5667

The ratio of return to systematic risk for an investment portfolio is 0.70, while the market is

0.50 This information suggests that the portfolio:

A) exhibits inferior performance because it has more risk than the market.

B) exhibits superior performance because the return per unit of risk is above that of

the market

C) is not diversi ed enough, and more securities should be purchased to bring the

portfolio in line with the market

Explanation

Risk-averse investors prefer a portfolio with a higher ratio of return to systematic risk to a

portfolio with a lower ratio In this case, we can also say that the portfolio would plot above

the SML since the portfolio's ratio is above that of the market Since portfolios that plot

above the SML are undervalued, they are likely to provide an above average return Note: The

ratio (Treynor's Measure) implicitly assumes a diversi ed portfolio, hence the use of beta (or

systematic risk) in the denominator

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Kelli Blakely, a portfolio manager with the Miranda Fund, a large cap index fund, achieved a

10.2% return during the past year while the S&P 500 lost 22.5% for the same period Her

portfolio consisted of stocks and cash Blakely was able to produce such returns through her

exceptional market timing and securities selection skills During the year, the S&P exhibited a

standard deviation of 44% while Blakely's portfolio standard deviation was 37% The calculated

beta on the Miranda Fund was 1.10 The market proxy and benchmark for performance

measurement purposes is the S&P 500

Using the S&P 500 as a benchmark for the year, the allocation between stock and cash was a

constant 97% and 3%, respectively During the year, Blakely was concerned that the

combination of a weak economy and geopolitical uncertainties would negatively impact the

market returns Taking a bold step, she changed her market allocation to an average of 50% in

stocks and 50% in cash Throughout the year, the risk-free rate of cash returns was 2%

What is the total value added?

Blakely's Miranda Fund was able to outperform the S&P 500 index by 32.7%

(Study Session 19, Module 36.3, LOS 36.l)

For a global portfolio, the money-weighted returns for the four quarters of last year are: 3%,

-2%, 5%, and 2.5% The corresponding time-weighted returns are: 2.5%, -1%, 4%, and 3.5%

What would an investor report as the annual rate of return on the portfolio?

A) 9.23%.

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In using micro attribution analysis to break down the performance of the manager of a fund,

the analyst nds the following for a particular asset class:

Sector Benchmark Weight 7%

Sector Portfolio Return 4%

Sector Benchmark Return 3%

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The micro attribution breakdown is below:

Pure sector allocation return:

Which of the following statements relating to allocation/selection attribution and fundamental

factor model attribution is least accurate?

A) The strength of allocation/selection attribution is that it is relatively easy to

calculate

B) The strength of fundamental factor analysis is its simplicity and the reliability of the

correlations it produces

C) The strength of allocation/selection attribution is that it disaggregates performance

e ects of manager’s decisions between sectors and securities

Explanation

A key weakness of fundamental factor model attribution is that it can prove to be complex

leading to the potential for spurious correlations

(Study Session 19, Module 36.6, LOS 36.m)

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The following data pertains to the UBZ Balanced Fund:

Asset Class

Fund Weight

Benchmark Weight

Fund Return (%)

Benchmark Return (%)

B) Allocation/selection attribution is relatively easy to calculate.

C) Allocation/selection attribution can lead to spurious correlations.

Explanation

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It is actually fundamental factor model attribution that can lead to spurious correlations

because the analysis is quite complex

(Study Session 19, Module 36.6, LOS 36.m)

Which of the following is the most appropriate method of calculating the manager's active

return? The manager's active return is the:

A) portfolio return minus the market return.

B) market return minus the benchmark return.

C) portfolio return minus the benchmark return.

Explanation

The manager's active return is the portfolio return minus the benchmark return, where the

benchmark is appropriate to the manager's style

(Study Session 19, Module 36.2, LOS 36.e)

Suppose that a portfolio management rm has abnormally high turnover in their sta Which of

the following is the most likely scenario?

A) The rm’s Type I error rate is high and their Type II error rate is high.

B) The rm’s Type I error rate is high and their Type II error rate is low.

C) The rm’s Type I error rate is low and their Type II error rate is high.

Explanation

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Type I error is retaining a poor manager and Type II error is ring a superior manager If a

rm has high turnover in sta , it is unlikely they are retaining poor managers but more likely

that they are ring good managers

Which of the following measures would be the most appropriate one to use when comparing

the results of two portfolios in which each portfolio contains many stocks from a broad

selection of di erent industries?

and is tied to the general level of overall risk in the market In this case the best measure to

use would be the Treynor measure since this uses beta or systematic risk as the measure of

risk The Sharpe ratio uses standard deviation as the measure of risk in the denominator and

the information ratio is best to use when comparing a portfolio to a benchmark

(Study Session 19, Module 36.7, LOS 36.q)

The following information is available for the Trumark Fund:

The Trumark Fund has an average annual return of 12% over the last ve years

Trumark has a beta value of 1.35

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Trumark has a standard deviation of returns of 16.80%.

During the same time period, the average annual T-bill rate was 4.5%

During the same time period, the average annual return on the S&P 500 portfolio was18%

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and the S&P 500 index over the same time period. Using Jensen's Alpha to measure the

risk/return performance of the Equity fund and the S&P 500, which of the following conclusions

A) The equity fund underperformed the S&P 500 by 6.12%.

B) The S&P 500 underperformed the equity fund by 2.67%.

C) The S&P 500 outperformed the equity fund by 3.24%.

Explanation

Jensen's Alpha: 0.23 – [0.035 + (0.27 – 0.035)1.09] = -0.0612 or -6.12% The negative means it

underperformed the S&P 500

Which of the following is least likely to be utilized in macro performance evaluation?

A) External cash ows into the fund.

B) Beginning of period fund valuations.

C) Pure sector allocation e ects.

Explanation

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Pure sector allocation e ects result from micro performance evaluation The inputs to macro

performance evaluation include policy allocations, benchmark portfolio returns, fund returns,

fund valuations, and external cash ows

B) Return on the default-free benchmark assumes no change in the forward rates.

C) The return due to the external interest rate environment is estimated from a term

structure analysis of AAA rate corporate securities

Explanation

The return due to the external interest rate environment is estimated from a term structure

analysis of Treasury securities We are trying to establish the return on a default free bond

portfolio, therefore the use of corporate securities would be inappropriate

(Study Session 19, Module 36.6, LOS 36.n)

Which of the following is NOT a conclusion regarding quality control charts and how they are

typically used to evaluate manager performance?

A) This is a two-tailed test.

B) Keeping a manager who generates no value added would be a Type I error.

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C) H0 will be that the manager adds no value; Ha is that the manager adds positive

value

Explanation

The test is set up as null, the manager generates no added value and the alternative is that

the manager adds value So we are looking for positive added value which is a one-tailed test

Therefore, the alternative will be that the manager generates positive value added

The following information relates to the Fabregas Pension Fund

Value of the fund if:

net contributions value is invested based

on the fund sponsor's policy allocations $220,369,968 passively invested in the aggregate of the

manager's respective benchmarks $221,031,078 invested in the aggregate of the

The actual value of the fund at the end of September

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Decision Making Level Fund Value

Incremental % Return Contribution

Incremental Value Contribution

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Decision Making

Level Fund Value

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Decision Making

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Decision Making

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Decision Making

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Decision Making

Custom security-based benchmarks re ect the manager's investment universe, weighted to

re ect a particular approach Which of the following is NOT an advantage of this type of

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A major disadvantage of custom security-based benchmarks is that they can be expensive to

construct and maintain The other statements are regarded to be advantages of using custom

Which of the following statements regarding the Sharpe ratio is most accurate?

A) The denominator of the Sharpe ratio is standard deviation which is comprised

partly of systematic risk called beta

B) The measure of risk used in the denominator of the Sharpe ratio is standard

deviation also known as unsystematic risk

C) Beta is not a component of the Sharpe ratio.

Explanation

The equation for the Sharpe ratio = (RP − RF) / σP

The Sharpe ratio contains standard deviation in the denominator of the equation which is

total risk and is comprised of both systematic risk called beta and unsystematic risk thus the

Sharpe ratio does contain a component of beta

(Study Session 19, Module 36.7, LOS 36.q)

One limitation of the money-weighted return is the fact that it:

A) penalizes managers for cash ows that occur outside of their control.

B) computes the return independent of the cash ows.

C) requires computations every time a cash ow occurs.

Explanation

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The money-weighted return computation penalizes managers for cash ows that occur

outside of their control

(Study Session 19, Module 36.1, LOS 36.c)

If a portfolio had an alpha of −10 bps, then the portfolio:

A) earned 10 bps less than the market.

B) had less risk than the market.

C) earned 10 bps less than the market on a risk-adjusted basis.

Explanation

Recall that Jensen's alpha measures excess return for a given level of risk It is a

"risk-adjusted" measure of return

There should be minimal systematic bias in the benchmark relative to the account Which of the

following statements about systematic bias is least accurate?

A) A manager's active decisions should be uncorrelated with the manager’s

investment style

B) The manager can calculate the historical beta of the account to the benchmark.

C) A beta signi cantly below one would be ideal as this would indicate that the

manager’s account is signi cantly less risky than the benchmark

Explanation

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Ideally, the manager would be looking for a beta close to one This would indicate that the

portfolio and benchmark are sensitive to the same systematic factors, which would be a

desirable characteristic If the beta di ers signi cantly from one, the benchmark may be

responding to a di erent set of factors, which is not a desirable characteristic of a

Fund Weight

Benchmark Weight

Fund Return (%)

Benchmark Return (%)

The overall benchmark return = 6.705%

The sector e ect = Σ [(portfolio wt – bench wt.)(bench sector return – bench

overall return)] = [(0.625 − 0.500)(8.64 − 6.705)] + [(0.250 − 0.333)(5.92 − 6.705)] +[(0.125 − 0.167)(2.47 − 6.705)] = 0.485%

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Which of the following least accurately characterizes the weighted return? The

time-weighted return:

A) can be expensive and error prone.

B) is similar to the internal rate of return.

C) is most appropriate for a manager who cannot control the timing of the cash ows

in and out of the fund

Explanation

The time-weighted return is not similar to the internal rate of return The money-weighted

return is similar to the internal rate of return and is also known as the linked internal rate of

return The other responses accurately characterize the time-weighted return

Which of the following is NOT regarded to be an essential characteristic of a valid benchmark?

A) Appropriate to the manager’s investment approach and style.

B) Re ective of past investment opinion.

C) Speci ed in advance.

Explanation

The benchmark has seven characteristics All of the above are included with the exception of

"re ective of past investment opinion", it should be re ective of current investment opinion,

and the manager should have current knowledge and expertise of the securities in the

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Which of the following risk measures is NOT dependent on capital asset pricing model (CAPM)?

The following table summarizes the performance attribution analysis for two xed income

managers of the Ashburton Fund for the year ending December 31, 2005:

Ashley Asset Management

Thierry Asset Management

Bond Portfolio Benchmark

Interest rate e ect –

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Ashley Asset Management states that its strategy is to outperform the index through active

interest rate management and bond selection

Thierry Asset Management states its policy is to immunize against interest rate exposure and to

earn positive contribution from bond selection

The two fund manager's active management process has yielded excess returns over the

benchmark How much of the excess performance is attributable to interest rate management

The interest rate management e ect is a combination of the impacts of 1) duration

management 2) convexity management and 3) Yield curve change management

(Study Session 19, Module 36.6, LOS 36.o)

Given the data in the above table can the manager's positive performance be attributed

primarily to their stated management objectives?

Ashley Asset Management Thierry Asset

Management

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C) No No

Explanation

Ashley Asset Management exceeded the benchmark by 33bps Interest rate management has

added 20bps (22bps − 10bps + 8bps) and bond selection 18bps This is a total of 38bps, which

is more than 100% of their outperformance

Thierry Asset Management exceeded the benchmark by 119bps Immunization against

interest rate exposure added 2bps and bond selection reduced performance by 16bps an

overall impact of -14bps Clearly Thierry Asset Management did not add contribution through

their stated objective, most of it came from sector selection!

Which of the following statements about the interest rate e ects on the performance of a

xed-income portfolio is least accurate?

A) The expected return is the return from implied forward rates.

B) The overall e ect represents the performance of a passive default-free bond

portfolio

C) The expected return is the return from the on-the-run Treasury spot rate curve.

Explanation

The expected return is the return implied by forward rates, not the on-the-run Treasury spot

rate curve Although the forward rates are derived from the spot rates, a two-year spot rate is

not the same as the expected forward rate in two years time

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Jack Jensen is the president of Jensen Management Jensen prides himself on the care of his

employees He states that in 30 years of portfolio management, he has only had to re two

employees Tom Mercer is president of Analytical Investors His policy has been to replace

poorly performing managers, where poor performance equals underperforming their

benchmark for two successive quarters Which of the following best describes these managers'

continuation decisions?

A) Jensen is not likely to be committing any error and Mercer is likely committing Type

II error

B) Jensen is likely committing Type I error and Mercer is likely committing Type II error.

C) Jensen is likely committing Type II error and Mercer is likely committing Type I error.

Explanation

Type I error is retaining (or hiring) a poorly performing manager Jensen is likely committing

Type I error because he rarely res anyone Type II error is ring (or not hiring) a superior

manager Jensen is likely committing Type II error because he res managers after only two

quarters of underperformance Two quarters is not enough time to properly evaluate a

In global performance evaluation, performance attribution seeks to:

A) di erentiate whether returns come from a manager’s luck or skill.

B) measure the risk and return of the portfolio.

C) identify the sources of di erence between portfolio and benchmark return.

Explanation

Performance attribution seeks to identify the sources of di erence between portfolio and

benchmark return Note that performance measurement involves the calculation of risk and

return, while performance appraisal seeks to identify whether returns are a result of a

manager's luck or skill

(Study Session 19, Module 36.1, LOS 36.b)

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You have performed attribution analysis for the XVX Portfolio and have determined that the

sector e ect was 0.322%, the within-sector selection was -0.157%, and the allocation/selection

e ect was 0.061% The benchmark return was 8.441% How much was the manager's total

value added for XVX, and what was the XVX Portfolio's return during the period?

Bud Seilman is the portfolio manager of a well-diversi ed equity portfolio The following

information is available about the portfolio for the latest year

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Within-sector selection E ect = ∑[(WBj × (RPj − RBj)]

Withinsector selection e ect = [(0.40 × (14 − 15)) + (0.35 × (19 − 12)) + (0.25 × (8 − 18))] =

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A) Sector rotation.

B) Both market timing and sector rotation.

C) Selecting assets within a market segment that will outperform the assets contained

within the corresponding benchmark index

Explanation

Both market timing and sector rotation are examples of asset allocation strategies

Frank Busby is on the board for a pension fund and would like to evaluate the fund's

performance and determine its sources of return Which of the following is Busby most likely to

utilize?

A) Performance decomposition analysis.

B) Micro performance evaluation.

C) Macro performance evaluation.

Explanation

Macro performance evaluation is performed at the fund sponsor level It decomposes fund

performance into that from net contributions, the risk-free asset, asset categories,

benchmarks, investment managers, and allocation e ects

Jack Gallon is a portfolio manager whose fund sponsor would like to evaluate his performance

It is very important to the fund sponsor to minimize tracking risk Which of the following would

be most appropriate for evaluating his performance?

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A) The information ratio.

B) Jensen’s alpha.

C) The Treynor ratio.

Explanation

The information ratio is the manager's excess return (relative to a benchmark return) divided

by the standard deviation of excess returns Because it measures risk and return relative to a

benchmark, it would be the most appropriate measure when the minimization of tracking

Which of the following statements regarding diversi cation and risk adjusted performance

measures is least accurate?

A) Treynor's performance measure assumes a well diversi ed portfolio.

B) Treynor's performance measure should be used to evaluate portfolios that will be

an addition to an overall larger portfolio

C) Investors want their portfolio managers to completely diversify their portfolios.

Explanation

If a portfolio manager completely diversi es (i.e., eliminates all non-systematic risk), then the

appropriate rate of return would be that of the market However, why would you pay active

management fees to get the same return of a passively managed index product? Treynor

uses beta as its risk measure, which means that it should be used in the context of a

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The Sharpe ratio, Treynor measure, the M2 measure and Jensen's Alpha techniques all measure

the risk/return performance of portfolios Which of the following statements about these

measurement techniques is least accurate?

A) Using the capital market line the M2 compares the account's return to the market

return and is a comparative measure

B) The Sharpe ratio measures the slope of the capital allocation line (CAL), with the

lowest slope having the most desirable risk/return combination

C) While the Treynor measure computes excess return per unit of risk, Jensen's Alpha

measures di erential return for a given level of risk

Explanation

Although it is true that the Sharpe ratio measures the slope of the CAL, the higher the slope

the more desirable the portfolio Your goal is to select the portfolio that has the highest

Sharpe measure, which will also have the steepest slope At any given risk level, the higher

the slope the greater the return

Of the Sharpe, Treynor, and Jensen's Alpha measures, when measuring the risk/return

performance of actively managed portfolios, which is the most appropriate to use?

A) Both measures are equally appropriate.

B) Jensen's Alpha.

C) Sharpe ratio.

Explanation

Jensen's Alpha measures the value added of an active portfolio strategy

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Tom Stovall is a portfolio manager who tracks the Wilshire 5000 Index He received a large cash

in ow from a client prior to a bull market Which of the following most accurately characterizes

the relationship for the time-weighted return and the money-weighted return for Tom? The

time-weighted return will be:

A) una ected by the timing of the cash in ow and the time-weighted return will be

larger than the money-weighted return

B) in ated by the timing of the cash in ow and the time-weighted return will be larger

than the money-weighted return

C) una ected by the timing of the cash in ow and the time-weighted return will be

smaller than the money-weighted return

Explanation

If a manager receives a large cash in ow from a client prior to a bull market, the

money-weighted return will be higher than the time-money-weighted return The time-money-weighted return will

be una ected by the timing of the cash in ow

Peter Michaels, CFA, works at Composite Investment Management Consulting (Composite),

where he is in charge of evaluating the performance of all separate account managers that

Composite uses for its institutional clientele His main tasks are to measure and evaluate the

sources of return that can be attributed to manager performance Michaels understands the

importance of incorporating risk into his analyses, but realizes there are limitations associated

with some performance measurement techniques in accomplishing that particular objective

Currently Michaels is working on an evaluation of the AMG large capitalization growth fund and

has assembled the following one-year return information

AMG Fund S&P 500

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