Chapter 9 – (10 marks, all multi response) The Performance Of Investments

Question 1

A common mistake people make with this chapter is to solely learn the mathematics. The reality is, that the exam questions often test your knowledge of what the calculations mean rather than the maths itself.

Question 2

Remind what me what BETA is

Answer 2

Question 3

What is the difference between performance measurement & performance evaluation and attribution.

Answer 3

Performance measurement = Calculating WHAT the return of the investment was over a given period

Performance evaluation and attribution =
HOW that return was achieved. Fund manager skills? Luck? etc

Question 4

Performance measurement is about calculating WHAT the return of an investment is over a given period

What are the 2 main ways of measuring an investments performance?

Answer 4

Money Weighted Return

Time Weighted Return

Question 4

The 2 main ways of measuring an investments performance (ie, ‘performance measurement’) is by using

Money Weighted Return
OR
Time Weighted Return

Tell me about using Money Weighted Return

Answer 4

Money Weighted Return = Measures the overall return on investment over a given period, taking into account money taken away or added during that time.

Question 5

What is the Holding Period Return?

Answer 5

It is the return of an investment over a given period expressed as a percentage

It is the most simple calculation when measuring an investments performance

Question 6

Tell me how to calculate the holding period return of an investment

Answer 6

How to calculate using Holding Period Return (HPR)

Take the value at the end (This includes any interest/dividends if applicable), minus the value at the start. This calculates the ‘gain’ of the investment.

Then, divide the gain by the value at the start, which gives a basic ‘percentage increase’, ie the HPR

Question 7

I am measuring an investments performance. Read below and tell me what I am calculating:

I calculated the gain of the investment by taking the value at the end and subtracting that from the value at the start. I then divided the gain by the starting value of the investment. This then gave me the percentage increase of the investment.

Answer 7

Here I am calculating the Holding Period Return of the investment

Question 8

What does Money Weighted Return take into account in relation to its calculation that the Holding Period Return doesn’t?

Answer 8

Money Weighted Return looks to calculate the same thing as the HRR but it also takes into account any money added or taken away during the given time period

It is more accurate than the HRR but is harder to calculate

Question 9

For context. The main difference between Money Weighted Return & Holding Period Return

Answer 9

Same thing except MWR takes into account money taken and added to the investment

Question 10

Tell me how to calculate the Money Weighted Return (MWR)

*Holding Period Return = HPR

Answer 10

Calculate ‘Gain’ (same as HPR except deduct any additional money invested or add any money withdrawn (C). This is because you want the gain only. remember this as being the opposite way around)

Then divide this by

Initial investment + (additional money as a ratio of how long it has been invested for)

= Money Weighted Return

Question 11

I am measuring an investments performance over a given period. Read below and tell me what I am calculating:

I calculated the gain of the investment by deducting the value of money added during the investment period. I then divided this by the sum of the initial investment and the additional money added (as a ratio of how long that additional money was invested for)

Answer 11

Here I am calculating Money Weighted Return

Question 12

When is using the Money Weighted Return calculation not appropriate?

Answer 12

MWR is not considered appropriate when trying to COMPARE performances of different portfolios

This is because MWR is strongly influenced by the timing of cash flows (ie, cash being added in and subtracted out during the period of the investment) This timing is outside of the fund manager’s control, and is often decided by the customer.

For example, A customer who adds money days before a rise in growth will show a much better return than a customer adding money days before a fall when using the MWR formula

Time-weighted return is therefore used to tackle this issue

Question 13

Answer 13

Question 14

The 2 main ways of measuring an investments performance (ie, ‘performance measurement’) is by using

Money Weighted Return
OR
Time Weighted Return

Tell me about how Time Weighted Return works and why it is used

Answer 14

WHY TWR is used: TWR is used to COMPARE performances of different portfolios (MWR is not an appropriate tool to do this when there are withdrawals and deposits at different times during the investment period)

TWR splits the investment into separate time periods where a new time period starts each time new money is introduced or a withdrawal is made. SEE IMAGE

Question 15

What is the formula for Time Weighted Return?

Answer 15

This formula shows 2 time periods. Investments can have multiple withdrawals and deposits so there could be more than 2

V1 = value at the end
V0 = value at the start
C = cash introduced
V2 = value at the end of final period

Question 16

Calculating Time Weighted Return in context

See formula:

V1 = value at the end
V0 = value at the start
C = cash introduced
V2 = value at the end of period

Answer 16

Remember: TWR splits the investment into separate time periods where a new time period starts each time new money is introduced or a withdrawal is made.

For questions that use multiple time period do first 2 time period, then do 2nd and 3rd time period like u did with 1st and 2nd, and so on and then multiple all answers together

Question 17

More exam questions using Time Weighted Returns

This is a comparison style question and is more likely

Answer 17

Question 18

NOTE: They have rounded it early on into the question so the final answer may be slightly different if you do it in one go on the calculator

Answer 18

For questions that use multiple time period do first 2 time period, then do 2nd and 3rd time period, and so on and multiple them all together

Question 19

To summarise what we have learnt so far:

Answer 19

MWRs can be used to calculate a valid return for an individual portfolio, but it gives misleading results if it is used for comparative purposes.

TWRs are widely used for comparative purposes because they are not affected by the timing of cash flows and new money inflows.

Question 20

What very important aspect of any investments performance do both weighted returns (TWR & MWR) not take into account at all?

Answer 20

These two weighted returns take no consideration of any risks taken.

Question 21

Both weighted returns (TWR & MWR) take no consideration of the risks taken when looking at the investments performance

What can be used to do this instead?

Answer 21

NOTE: Performance ratios are used to evaluate risk, not to measure it like the formulas above measured performance by looking at returns.

There are 3 performance ratio. These are: SEE IMAGE

Each have respective formulas

Question 22

The 3 performance ratios are: see image

Tell me what the purpose of The Sharpe Ratio is.

Answer 22

The Sharpe ratio shows whether a portfolio’s returns are due to good investment decisions or because of excess risk.

Although one portfolio or fund may provide higher returns than its peers, it is only a good investment if the higher returns do not come with too much additional risk.

The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance
has been. With Sharpe, high is good.

Question 23

A portfolio has a negative Sharpe ratio. Is this good or bad?

Answer 23

This shows the portfolios returns are due to excess risk so not because of good investment decisions

A low Sharpe ratio is bad. High is good

A negative Sharpe ratio indicates that a riskless asset would perform better than the security being analysed.

Question 24

What is the Sharpe Ratio formula?

If we look at the formula before we try to understand and use it, we can see that the top line deducts the risk-free return from the overall return. This means we are isolating the risky element of the investment.

The result is divided by the bottom line, the risk measured by Standard Deviation (ie, how volatile it is compared to the market)

Answer 24

Risky divided by standard deviation.

JUST REMEMBER WHEN USING SHARPE RATIO, YOU WANT TO ISOLATE THE RISKY ELEMENT SO YOU MUST GET RID OF THE RISK FREE ELEMENT THROUGH SUBTRACTION

In example image, this indicates that the portfolio earned a 0.857% return above the risk-free rate for each unit of risk taken. Higher Sharpe the better

Again, questions in the R02 exam tend to be ‘comparison questions’, where you are asked to state which fund manager has achieved the highest risk-adjusted return, or ‘theoretical questions’ asking what Sharpe ratio actually measures.

EXAM TIP: the risk-free return in Sharpe and Alpha can be called some other things in your exam.
Common variations include:
‘91-day treasury bills’.
‘Cash ISA’.

Question 25

Beta indicates how closely we would expect a security to ‘follow the market’.

What does Alpha do?

Answer 25

Alpha looks at the returns a security has produced and compares it to what we expected it to produce (based on its beta).

A positive Alpha indicates that the security has performed better than would be predicted given its Beta and a negative Alpha indicates it has performed worse.

It therefore shows the value added or taken away by a manager, through active management and stock selection.

Question 26

How are Beta and Alpha linked?

Answer 26

Beta indicates how closely we would expect a security to ‘follow the market’

Alpha looks at the returns a security has produced and compares it to what we expected it to produce (based on its beta).

A positive Alpha indicates that the security has performed better than would be predicted using its Beta, which in turn shows the value added or taken away by a manager, through active management and stock selection.

Question 27

How do you calculate Alpha?

Answer 27

Calculate the ‘expected return’ using CAPM formula, then deduct this from the actual return (to find alpha)

Expected return = (Risky* x Beta) + Risk free.

*Risky = market return - risk free

Then,

Alpha = actual return - expected return

In the case of example 9.5, this is
(2% x 1.3) + 5 = 7.6%. This is then deducted from the actual return. 8 – 7.6 = 0.4%

EXAM TIP: the risk-free return in Sharpe and Alpha can be called other things in your exam such as ‘91-day treasury bills’ or ‘Cash ISA’.

You must also remember to isolate the risky element hence risky*

Question 28

Easy way to calculate alpha

Answer 28

First calculate the ‘expected return’ using CAPM formula, then deduct this from the actual return

Question 29

What is the Information Ratio and what does it do and how does it work?

Answer 29

Information ratio = one of the 3 performance ratios

The information ratio measures a portfolio manager’s ability to generate excess returns relative to a benchmark.

A positive Information Ratio shows that active management was a better option, and a negative figure indicates that the customer would have been better off with a tracker fund.

Question 30

The Information Ratio of a Portfolio is high

The Sharpe Ratio of a portfolio is high

The Alpha of a portfolio is high

Answer 30

With all ratios: higher is better.

High Sharpe ratio = A higher Sharpe ratio means a portfolio has better risk-adjusted performance. (ie, the performance is down to good stock selection)

High Information ratio = The fund preformed well compared to its benchmark. ie, active management was a good choice.

high alpha = The investment outperformed what was expected of it, when taking into account its level of risk (the risk level is shown by the portfolios Beta)

Question 31

What is the formula for the Information Ratio?

The formula is saying ‘By how much did our fund over (or under) perform compared to the benchmark, expressed as a proportion of the tracking error’.

Answer 31

Portfolio return - bench mark return divided by tracking error

Question 32

EXAM TIP: the risk-free return in Sharpe and Alpha can be called some other things in your exam.

Common variations include:
‘91-day treasury bills’.
‘Cash ISA’

Question 33

Tell me how you calculate all 3 respective investment ratios

Answer 33

Alpha =
Calculate ‘expected return’ using CAPM formula, then deduct this from the actual return
Expected return = (Risky* x Beta) + Risk free.
Risky = market return - risk free

Information ratio =
(Portfolio return - bench mark return) divided by tracking error

Sharpe ratio =
(Return on investment - risk free return) divided by standard deviation

Question 34

Portfolio managers achieve good or bad results by the exercise of asset allocation, stock selection, market timing, and risk: Explain each point

How does ‘Performance attribution’ relate to this?

Answer 34

Performance attribution reviews each of these to assess the overall performance of a portfolio.

Question 35

When starting the process of Performance attribution, the first step is to select a bench mark to compare your portfolio to

It is important to select a suitable benchmark. Why is this?

What is the next step after choosing a benchmark?

Answer 35

To compare the portfolio must have a similar size and objective to yours.

For example, It is pointless comparing a UK Gilt portfolio against the FTSE 100 index. It will teach you nothing, you are comparing apples and pears.

The next step is to review the benchmark’s asset allocation

Question 36

What is Performance attribution and what are its steps?

Answer 36

Performance attribution is a process used to analyse and explain the reasons behind a portfolio’s performance relative to a benchmark.

Its steps are as followed: See image

ie, first you select a suitable benchmark, then review the benchmarks asset allocation and so on

Question 37

The 2nd step of Performance attribution, which comes after selecting a suitable benchmark is to review the benchmarks allocation % of each asset class

True or false

Answer 37

True

You may find the benchmark looks something like the image

Question 38

The 3rd step of Performance attribution is WHAT?

This comes after selecting a suitable benchmark (step 1) and then reviewing the asset allocation % of each asset class in the selected benchmark (step 2)

Answer 38

Assess the benchmark’s asset’s returns and how much each asset contributed to the overall return

To do this you look at how each asset performed over the period you are assessing by checking the the relevant index. For example, use FTSE all-share index when calculating equities

This will then show a figure that is how well that asset has preformed over the given time period. In our example equities rose by 25%

You then multiply this by the asset’s allocation value in your benchmark.

In our example, the benchmark is made up of 60% equities. It rose by 25% as stated in the index, so it is 60 x 25% = 15%

This means equities have contributed 15% to the benchmarks overall returns of 19.74% (so obvs a lot relatively)

This means that a manager who decided to match the benchmark exactly (and remember most try to be close to it) will achieve a return of 19.74%. Some managers will feel they can do better and/or know better, and they will vary their own asset allocation away from that of their chosen benchmark.

Question 39

The 4th step of Performance attribution is what?

This comes after selecting a suitable benchmark (step 1) and then reviewing the asset allocation of the selected benchmark (step 2), and then checking how each asset preformed (by looking at a relevant index) to calculate its contribution to the benchmarks
overall returns, relative to its proportion of allocation in the benchmark (step 3)

(NOTE: In this step I will be assuming that the portfolio manager has varied their asset allocation away from the benchmark, as there would be no point/no comparison doing this otherwise)

Answer 39

To compare portfolio’s manager allocation to the benchmarks

You do this by calculating the performance of the managers portfolio* and then comparing these results to the benchmark

*To calculate the managers portfolio’s performance you do the same process as you did in step 3 when calculating the assets contributions of the benchmark, but for the managers portfolio instead

See both images:
You can see that the manager decided to lower equities and increase fixed interest and cash when compared to the benchmark. Because of this, the manager has underperformed the benchmark by 1.79% (19.74% - 17.95%) so his decision to ‘under weigh’ the equities was a bad one

NOTE:
KEEP IN MIND The risk profile may have meant the manager decided to be more cautious in his portfolio and it is possible that the choice of benchmark is wrong,

Question 40

What is the 5th and final step of Performance attribution?

This comes after selecting a suitable benchmark (step 1) followed by reviewing the asset allocation of that selected benchmark (step 2), followed by checking how each asset preformed (by looking at a relevant index) to calculate its contribution to the benchmark’s overall returns (step 3), followed by comparing the benchmarks performance to the manager’s portfolio performance if the manager chose a different allocation (step 4)

Answer 40

The final step is to compare Stock selection and/or sector choice between the benchmark and the managers portfolio

Remember: asset allocation isn’t everything. Even if the manager matched the asset allocation, there could still be discrepancies in performance.

Let’s say that two different managers decided to hold 60% in UK equities.

One manager may decide that they want to focus on financial services.
The other may focus on oil companies.
This would drive different returns.

Question 41

The 5th and final step of Performance attribution is to calculate the contribution that the individual stock selection and/or sector choice had by comparing the managers portfolio to a relevant index

The aim is to see how the manager’s selection of investments within each asset class performed, relative to the appropriate index.

How do you do this?

Answer 41

To calculate the contribution of the individual stock and/or sector choice do the following:

Minus the index performance % from the actual performance % and then multiply this by the asset allocation.

So, for fixed-interest we have (10% – 8%) x 18% = 0.36%.

SEE ALL STEPS:
Here we have kept the benchmark asset allocation and its index performance from previous steps, and have added in the ‘actual performance’ seen in our portfolio for each asset class. This is not in previous steps, just for this one so you can see how it works

From previous steps, we know that the managers portfolio underperformed, due to the fact that the manager decided to underweight UK equities, but we can see from the table above that the actual performance of 28% was above that of the index benchmark performance of 25% for the individual stock/sector selection. This is the difference between asset allocation and individual stock selection. This shows that if the manager chose the same asset allocation as the benchmark his portfolio would’ve preformed better due to his individual stock/sector selection.

Question 42

Tell me what performance ratio belongs to what definition below

is a measure of how well the return on an asset compensates the investor for the risk taken.

is the difference between the return you would expect from a security, given its Beta, and the return it has actually produced.

is used to assess the risk-adjusted performance of active fund managers. It shows the consistency with which a manager beats a benchmark.

Answer 42

The Sharpe Ratio is a measure of how well the return on an asset compensates the investor for the risk taken.

Alpha is the difference between the return you would expect from a security, given its Beta, and the return it has actually produced.

The Information Ratio is used to assess the risk-adjusted performance of active fund managers. It shows the consistency with which a manager beats a benchmark.

Question 43

What are the two Performance measurements?

Answer 43

The two most common ways of measuring returns are money-weighted and time-weighted returns.

Question 44

What is Performance attribution at a very high level?

Answer 44

This involves analysis to differentiate between returns as a result of asset allocation decisions versus sector or stock-selection decisions.

The 5-step process involves:

Step 1: Choose a benchmark.

Step 2: Determine the asset allocation % of each asset in the benchmark.

Step 3: Determine the performance of each asset class in the benchmark (by using indices) and then using that, calculating the asset’s contribution to the benchmarks overall performance taking account of its proportion of allocation in the benchmark

Step 4: Calculate the return of the managers portfolio in the same way as you did to the benchmark in step 3, and then comparing both results. This shows whether the benchmark or portfolio better asset allocation, therefore showing of the fund manager made a good choice or not

Step 5: Compare the portfolios individual stock/sector selection to a relevant indices. This tells you if the manager made a good choice with stock/sector selection or not

You can then compare all.

Question 45

Two fund managers have the following returns on their portfolios:

Manager A / Manager B

Returns = 10% / 13%

Standard Deviation = 7% / 12%

If the risk-free return is 4%, it is true to say that… SELECT ALL THAT APPLY

the Sharpe Ratio for Manager A is 0.86

the Sharpe Ratio for Manager A is 1.43

the Sharpe Ratio for Manager B is 0.75

the Sharpe Ratio for Manager B is 1.08

Manager A was able to generate a higher risk-adjusted return

Answer 45

the Sharpe Ratio for Manager A is 0.86

the Sharpe Ratio for Manager B is 0.75

Manager A was able to generate a higher risk-adjusted return

explanation:
The formula for Sharpe is the return, minus the risk-free return, divided by Standard Deviation.

Manager A is (10 – 4) ÷ 7 = 0.86

Manager B is (13 – 4) ÷ 12 = 0.75

Manager A has generated the higher risk-adjusted return. (The higher, the better)

Question 46

A fund has a Sharpe Ratio of 0.75, an Alpha of 1.2, and an Information Ratio of 0.33. This indicates that… SELECT ALL THAT APPLY

a risk-free investment would have performed better

the fund has performed better than would have been expected from its Beta

overall, the fund manager has performed better than the market

the fund has performed worse than a tracker fund would have done

the return achieved has compensated the investor for the level of risk taken

Answer 46

B C & E

The positive Sharpe Ratio demonstrates that the fund has outperformed a risk-free investment and compensated the investor for the additional risk taken.

The positive Alpha indicates it has performed better than would have been expected from its Beta.

The positive Information Ratio indicates that the fund has performed better than a tracker fund and market.

Question 47

Alpha is a measure often used to evaluate the performance of investments. It is true to say that…

Alpha represents the extent that a fund moves in relation to the market

a positive Alpha indicates that a fund manager has done well with his stock-picking

Alpha is the difference between the return you would expect from a security, given its Beta, and the return it has actually produced

Alpha measures systematic risk

Answer 47

B & C

explanation:

It is Beta that represents the extent that a fund moves in relation to the market, not Alpha, so not answer A.

Alpha is calculated by taking the actual return minus the expected return (calculated similar to CAPM) so shows the difference in return between expectation and reality.

A positive Alpha means that expectations have been exceeded, the manager picked well.

Alpha measures unsystematic or market risk, not systematic, which is measured by Beta.

Question 48

Alpha measures unsystematic or market risk

Beta measures systematic risk

True or false

Answer 48

True

Question 49

Tony is selecting a fund manager for one of his investments. He intends to invest in a fund which targets specialist markets overseas. Which of the following should he consider in making his decision?

The fund manager’s experience in the relevant markets

The house policy of the fund manager’s investment company

The size of funds that the fund manager has under his management

The past performance of funds within the same sector

Stability of staff within the fund manager’s team

Answer 49

A B C & E

Explanation:

Stability, expertise, the house policy and size of funds would all come into play when considering investment funds and managers.

Not D because:
For a specialist fund, it can be misleading to compare past performance with funds in the same sector, given that they are often very different in their structure, for example, specialist funds often have unique and specific investment strategies that differ significantly from one another. For instance, one specialist fund might focus on emerging markets within a specific industry, while another might target technological innovation in a different region. Ie the stock selection may be different =

Question 50

The time-weighted return can be a useful calculation when assessing performance, as it… SELECT ALL THAT APPLY

can be used to compare performance between portfolios from different managers

allows for the introduction of new money

shows where the manager has added value through their stock selection

demonstrates where a fund has performed better than an index-tracker fund

shows a risk-adjusted return, which can be used to compare performance against an index

Answer 50

A & B

Explanation:
TWR does not show a risk adjusted return. It just compares actual returns.

TWR is best used as a comparison between similar funds.

It breaks the period being assessed down into sub-periods, allowing for adjustments to be made when new money is added (or taken away).

Answer C explains Alpha; D explains Information Ratio; E looks like it might be about the Sharpe Ratio (which shows the risk adjusted return) but this isn’t used to compare performance against an index.

TWR does not necessarily show a risk adjusted return. It normally compares actual returns.

Question 51

A fund manager’s average portfolio return is 12%, compared to a benchmark average annual return of 8%. The tracking error is 4% and the standard deviation is 6%. If you were using the Information Ratio to evaluate this performance, then you would note that…

the fund manager has underperformed the average comparable fund

the fund is more likely to be following an active fund management approach than a passive approach

the Information Ratio is 1.00

the Information Ratio is 0.67

the fund manager’s stock-picking skills are lower than the average

Answer 51

B & C

The Information Ratio is return minus benchmark return divided by tracking error

so in this case:
12 – 8 ÷ 4 = 1.

The fact that it is positive shows that the fund manager has exceeded the average comparable fund.

IR is not specifically concerned with stock picking which is more Alpha’s remit. If anything could be read into the information provided it would be that the manager has done well compared to the index and not poorly.

Question 52

If a customer expresses dissatisfaction with their investments at a review, the adviser should…

increase the risk of the portfolio to meet the higher return expectations

switch the investment into one that sits higher on the efficiency frontier

re-establish the customer’s attitude to investment risk

update the fact find to see if there have been any changes in the customer’s circumstances

instruct the customer to put their concerns in writing

Answer 52

C & D

Explanation:
An expression of dissatisfaction needs to be investigated, looking at more than the performance of the investment. It has clearly not performed as the customer expected it to.

Therefore, along with a general performance review, it would be prudent to re-establish a risk profile and see if the customer’s circumstances have changed.

No switch should be made without agreement. Concern does not have to be expressed in writing; it could be verbal.

Question 53

A firm offers both advisory and discretionary management services. In comparing these, it should be noted that…

the advisory service will have lower costs

only the advisory service needs the customer’s approval to trade on each transaction

both services have the same duty of care for customers

the advisory service carries more risk to the customer

Answer 53

b & c

Explanation:

The advisory service is not a cheaper option. In fact, it is often more expensive, due to the requirement for the firm to contact the customer before making a trade. It is more labour intensive than a discretionary service.

Discretionary services provide the firm with the ability to trade on behalf of the customer, within an agreed scope, so some transactions will be possible, without seeking specific customer approval.

There is an equal emphasis on discretionary and advisory services to match customers’ expectations.

Risk should be contained within the scope agreed with the customer, so advisory is certainly no riskier than the discretionary service.

Question 54

A reason for using the Information Ratio (IR) when calculating a portfolio’s performance could be to…

gauge the skill of the manager in consistently outperforming benchmarks

provide the Portfolio Turnover Rate

see if a positive IR has been achieved, which would suggest that the portfolio has performed better than an exchange-traded fund

show the holding period return of the investment

Answer 54

A & C

Explanation:
The IR is mainly used to see if the fund has performed better than the market that it most closely aligns to.

It is therefore an often-used gauge of whether the manager has outperformed the market or tracker fund - which is what an exchange traded fund is

It does not provide the Portfolio Turnover Rate nor the holding period return, which have their own calculations.

Question 55

Look at the image

In evaluating the impact of asset allocation on a portfolio’s performance, the following information is gathered. Which of the following statements are correct?

The portfolio is underweight in overseas equities in relation to the benchmark, and this has had a negative effect on performance

The portfolio is overweight in fixed-interest securities, and this has had a negative effect on performance

Overall, the portfolio manager’s asset allocation performed better than the benchmarks

Overall, the benchmark performed better than the portfolio manager’s asset allocation

Answer 55

A & D

Looking at each possible answer in turn…

Answer A: You can instantly see that the portfolio is underweight in overseas equities. It has 10% allocated to it on the portfolio and 20% on the benchmark. As the top performing index asset class at 20%, this has had a negative effect on performance. This can be seen by comparing the contribution from overseas equities in the 2 tables.

Answer B: The portfolio is overweight in fixed-interest. But this has contributed 3% to the return instead of 2.50% so hasn’t had a negative effect on performance.

Answers C & D are opposites, so only one could be correct. You can see that the benchmark produced a 14% return against the portfolio’s 13.50%. The manager underperformed his benchmark.

NOTE. THIS CAN BE DONE USING A CALCULATOR. U DONT NEED TO DO A FULL TABLE