Chapter 26-27 Portfolio Performance & Investment Manager Selection

Question 1

Absolute return benchmark

Answer 1

A minimum target return that an investment manager is expected to beat.

Question 2

Arithmetic attribution

Answer 2

An attribution approach which explains the arithmetic difference between the portfolio return and its benchmark return. The single-period attribution effects sum to the excess return, however, when combining multiple periods, the sub-period attribution effects will not sum to the excess return.

Question 3

Capture ratio

Answer 3

A measure of the manager’s gain or loss relative to the gain or loss of the benchmark.

Question 4

Carhart model

Answer 4

A four factor model used in performance attribution. The four factors are: market (RMRF), size (SMB), value (HML), and momentum (WML).

Question 5

Custom security-based benchmark

Answer 5

Benchmark that is custom built to accurately reflect the investment discipline of a particular investment manager. Also called a strategy benchmark because it reflects a manager’s particular strategy.

Question 6

Drawdown

Answer 6

A decline in value (represented by a series of negative returns only) following a peak fund valuation.

Question 7

Drawdown duration

Answer 7

The total time from the start of the drawdown until the cumulative drawdown recovers to zero.

Question 8

Due diligence

Answer 8

Investigation and analysis in support of an investment action, decision, or recommendation.

Question 9

Excess return

Answer 9

Used in various senses appropriate to context: 1) The difference between the portfolio return and the benchmark return; 2) The return in excess of the risk-free rate.

Question 10

Factor-model-based benchmarks

Answer 10

Benchmarks constructed by examining a portfolio’s sensitivity to a set of factors, such as the return for a broad market index, company earnings growth, industry, or financial leverage.

Question 11

Holdings-based attribution

Answer 11

A “buy and hold” attribution approach which calculates the return of portfolio and benchmark components based upon the price and foreign exchange rate changes applied to daily snapshots of portfolio holdings.

Question 12

Holdings-based style analysis

Answer 12

A bottom-up style analysis that estimates the risk exposures from the actual securities held in the portfolio at a point in time.

Question 13

Interaction effect

Answer 13

The attribution effect resulting from the interaction of the allocation and selection decisions.

Question 14

Investment style

Answer 14

A natural grouping of investment disciplines that has some predictive power in explaining the future dispersion of returns across portfolios.

Question 15

Key person risk

Answer 15

The risk that results from over-reliance on an individual or individuals whose departure would negatively affect an investment manager.

Question 16

Macro attribution

Answer 16

Attribution at the sponsor level.

Question 17

Manager peer group

Answer 17

Manager universe; A broad group of managers with similar investment disciplines. Also called manager peer group.

Question 18

Manager universe

Answer 18

A broad group of managers with similar investment disciplines. Also called manager peer group.

Question 19

Micro attribution

Answer 19

Attribution at the portfolio manager level. Whether returns are consistent wit hthe stated investment process.

Question 20

Performance attribution

Answer 20

Attribution, including return attribution and risk attribution; often used as a synonym for return attribution.

Question 21

Return attribution

Answer 21

A set of techniques used to identify the sources of the excess return of a portfolio against its benchmark.

Question 22

Returns-based attribution

Answer 22

An attribution approach that uses only the total portfolio returns over a period to identify the components of the investment process that have generated the returns. The Brinson, Hood, Beebower approach is a returns-based attribution approach.

Question 23

Returns-based benchmarks

Answer 23

Benchmarks constructed by examining a portfolio’s sensitivity to a set of factors, such as the returns for various style indexes (e.g., small-cap value, small-cap growth, large-cap value, and large-cap growth).

Question 24

Returns-based style analysis

Answer 24

A top-down style analysis that involves estimating the sensitivities of a portfolio to security market indexes.

Question 25

Risk attribution

Answer 25

The analysis of the sources of risk.

Question 26

Risk premium

Answer 26

An extra return expected by investors for bearing some specified risk.

Question 27

Sharpe ratio

Answer 27

The average return in excess of the risk-free rate divided by the standard deviation of return; a measure of the average excess return earned per unit of standard deviation of return. Also known as the reward-to-variability ratio.

Question 28

Stop-losses

Answer 28

A trading order that sets a selling price below the current market price with a goal of protecting profits or preventing further losses.

Question 29

Transactions-based attribution

Answer 29

An attribution approach that captures the impact of intra-day trades and exogenous events such as a significant class action settlement.

Question 30

Idiosyncratic Risk

Answer 30

A category of investment risk that is unique to an individual asset