Chapter 18 - Portfolio Performance Evaluation Flashcards
If Primo decides to use return-based style analysis, with the R2 of the regression equation of a passively managed fund be higher or lower than that of an actively managed fund?
Very High
Passively managed fund is mimicking the benchmark.
Which of the following statements about Primo’s global fund is most correct? Primo appears to have a positive currency allocation effect as well as:
A. A negative market allocation effect and a positive security allocation effect.
B. A negative market allocation effect and a negative security allocation effect.
C. A negative market allocation effect and a negative security allocation effect.
D. A positive market allocation effect and a negative security allocation effect.
A
Euro appreciated, pound depreciated
Greater stakes in euro-denominated assets = positive currency allocation effect.
British outperformed Dutch = negative market allocation effect.
Out-performed with Dutch, underperformed with British = positive security allocation effect.
A plan sponsor with a portfolio manager who invests in small-capitalization, high-growth stocks should have the plan sponsor's performance measured against with one of the following? A. SP 500 Index B. Willshire 5000 Index C. Dow Jones Industrial Average D. Russell 2000 Index
D
The chairman provides you with the following data covering one year, concerning the portfolios of two of the fund’s equity managers. Although the portfolios consist primarily of common stocks, cash reserves are included in the calculation of both portfolios betas and performance.
Explain two reasons the conclusion drawn from the alpha calculation may be misleading.
One year of data is too small a sample.
Significantly different levels of diversification.
Managers may have tried to time the market, SCL will not be linear.
“Our one-year results were terrible, and it’s what you’re done for us lately that counts most.”
One year is a poor statistical base to draw inferences.
Fund manager was directed to adopt a long-term horizon.
Instructed to give priority to long-term results.
“Our total fund performance was clearly inferior compared to the large sample of other pension funds for the last five years. What else could this reflect except poor management judgement?”
Sample held a larger hare in equities compared to Alpine pension funds.
Equity returns significantly exceed bond returns.
Directed to hold hold risk.
Shouldn’t be held responsible for an asset allocation policy dictated by the client.
“Our common stock performance was especially poor for the five-year period.”
Alpha was positive
“Why bother to compare your returns to the returns from Treasury bills and the actuarial assumption risk? What your competition could have earned for us or how we would have fared if invested in a passive index are the only relevant measures of performance.”
Bond performance has been poor is significant, because of asset class encouraged to hold. Within the asset class, fund fared better than the index. Fund outperformed actuarial return and T-bills over 5 year period. Disappointing returns due to asset allocation heavy in bonds, which is Board's fault.
“Who ares about time-weighted returns? If it can’t pay pensions, what good is it!”
That return is more indicative of manager’s performance.
Manager has not control over cash inflow to fund.
What are the advantages of ETFs over mutual funds?
Lower taxes
Lower costs
Ability to trade index portfolios intra-day.
Ability to engage in margin purchases and short sales.
What are the disadvantages of ETFs compared to mutual funds?
Price deviation from NAV
Payment of brokerage fees to trade funds.
What are the differences between bottom-up and top-down approaches to security valuation?
Top-down: begins with analysis of global and domestic economy, then narrow down to industry or sector, and finally focus on specific company within an industry or sector.
Bottom-up: emphasizes fundamental analysis of individual company stocks and based on belief undervalued stocks will perform well regardless of industry prospects or broader economy.
What are the advantages of a top-down approach?
Structured approach for incorporating impact of economic and financial variables at every level into analysis of company’s stock.
What do you see as the major advantage of using puts as hedge vehicles?
Allows investors to enjoy upward profit potential while also protecting profits already made on long transactions.
Worse case of put hedge is loss of the cost of the put.
Would Lance have been better off using in-the-money puts?
More expensive and riskier as a heading device.
