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CFA Level III > Performance Evaluation > Flashcards

Performance Evaluation Flashcards

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1
Q

Performance from Fund Sponor’s Perspective

A

Performance shows the following:

  1. How effective IPS is
  2. Underperformance
  3. Results of active management

For feedback and control

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2
Q

Components of Performance Evaluation

A
  1. Performance measurement
  2. Performance attribution
    1. determines source of return
  3. Performance appraisal
    1. determine if its skill (should we fire a manager)
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3
Q

Return Calculation with Cash Flows

A

CF at beginning:

rt = EV - (BV + CF) / BV + CF

CF at end:

rt = (EV - CF) - BV0 / BV

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4
Q

TWR

A

Unaffected by external cash flows

Calculate returns subtracting cash flows then add together;

(1 + r)(1 + r)(1 +r) - 1

Example: 2.5M start, 2.7M end. 45K CF day 7, 25K CF day 19
Day 7 2.555M, day 19 $2.575M

(2,555,000-45,000) - 2,500,000 / 2,500,000 = 0.4%
(2,575,000-25,000) - 2,555,000 / 2,555,000 = -0.2%
(2,700,000) - 2,575,000 / 2,575,000 = 4.9%
(1 + .004)(1 - .002)(1 + .049) - 1 = 5.1%

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5
Q

MWRR

A

EV = BV(1 + r)n + CF(1 + r)n

Just plug in figures for r

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6
Q

TWRR vs. MWRR

A
  • *TWR**
  • *+** unaffected by timing of cash flows
  • *+** required for GIPS
  • *-** need to know valuations on each CF date
  • *MWR**
  • *+** good if manager controls CF
  • *-** distorted by size and timing of CF
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7
Q

TWR vs MWRR

Which is better?

A

Cash Prior to _____ Performance Result

None None Same

+CF Strong MW > TW

+CF Weak TW > MW

  • CF Strong TW > MW
  • CF Weak MW > TW
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8
Q

Data Quality for Returns

A
  • Stale price:
    • Illiquid assets - use estimates
    • Fixed income - use matrix
  • Should include accrued interest and dividends
  • Use trade date
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9
Q

Portfolio Return Components

A

P = Market + Style + Active

M = market return, Style = B - M, Active = P - B

Client responsible for S
Manager responsible for A

Example: LC Value Fund earns 18.9% for 3 quarters
Russell 1000 Value = 21.7%, Wilshire 5000 = 25.2%

Style = 21.7 - 25.2 = -3.5%
Active = 18.9 - 21.7 = -2.8%
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10
Q

Valid Benchmark

A

SAMURAI

  • Specified in advance
  • Appropriate
  • Measurable
  • Unambiguous (Clear/Precise)
  • Reflective of manager’s current investment opinons
  • Accountable
  • Investable
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11
Q

Types of Benchmarks

A
  1. Absolute return: i.e. 5%
    1. Drawback: NOT investable
  2. Peer group
    1. Drawback: subject to survivor bias, NOT investable
    2. Fails every quality test EXCEPT measurable
  3. Broad market index
    1. Drawback: manager style may deviate
  4. Style index
    1. Drawback: different definitions of style
  5. Factor-based models
  6. Return-based
  7. Custom
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12
Q

Testing Benchmark Quality

A
  1. Mutually exclusive with indices/asset classes
  2. Exhaustive of manager’s investment universe
  3. Represent distinct sources of risk
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13
Q

Hedge Fund Benchmarks

A

Hard to assign a benchmark. Use:

  1. Value-added return for each position
  2. Separate long/short benchmarks
  3. sharpe ratio often used but not appropriate
  4. Market neutral should be Rf
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14
Q

Macro Attribution Analysis Levels

A

Beginning Value

  1. Net contribution
  2. Rf
  3. Asset categories (pure indexing SAA from IPS)
  4. Benchmarks (pure indexing TAA from manager)
  5. Investment managers (active management)
  6. Allocation effects (error/plug number)
    * *Ending Value**
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15
Q

Micro Attribution Components

Pure Sector Allocation

A

Definition: Sector deviation from benchmark

Formula:

(Wp,s - Wb,s) * (Rb,s - Rb)

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16
Q

Macro Attribution

Formulas

A

Asset Category: weight(B - Rf)

Style/Misfit: weight * weight * (misfit return)

Investment Manager: weight * weight * (true active return)

17
Q

Micro Attribution Components

Within-sector Selection

A

Definition: Security selection deviation from benchmark

Formula:

(Wb,s) * [(Rp,s - Rb,s)]

18
Q

Micro Attribution Components

Allocation/Selection Interaction

A

Definition: Sector deviation from benchmark

Formula:

(Wp,s - Wb,s) * (Rp,s - Rb,s)

19
Q

All Micro Attribution Components

A

Pure Sector Allocation: (Wp,s - Wb,s) * (Rb,s - Rb)

Within sector selection: (Wb,s) * [(Rp,s - Rb,s)]

Allocation/Selection Interaction: (Wp,s - Wb,s) * (Rp,s - Rb,s)

20
Q

Fundamental Factor Models for Micro Attribution

A

Regress historical returns vs factors. Help identify:

  • source of portfolio returns
  • sector rotation
  • ability to time market

+ considers other factors + insight to investment style
- complex

21
Q

Fixed Income Attribution Details

External Interest Rate Effect

A
  1. Just the benchmark
  2. Not under manager’s control
  3. Expected: simulated return on default-free benchmark
  4. Unexpected: return based on actual price changes

*This is what was earned passively*

22
Q

Fixed Income Attribution Details

Manager Attribution

A
  1. Interest rate management
    1. Duration, convexity, YC shape change
  2. Sector/quality management - weighting of sectors/quality
  3. Security-selection - effect on held securities
  4. Trading - plug figure (error/unknown)

*Must sum up to actual portfolio return*

23
Q

5 Types of Risk-Adjusted Measures

A
  1. Jensen Alpha: Rp - CAPM [Rf + B(Rm - Rf)]
  2. Treynor: (Rp - Rf) / Bp
  3. Sharpe: (RP - Rf) / stdp
  4. M2: Rf + [(Rp - Rf / stdp) * stdm]
  5. IR: active return / active risk
24
Q

Jesen Ex post Alpha

A

Rp - [Rf + B(Rm - Rf)]

  • Cosiders only systematic risk (beta)
  • Good for actively managed portfolios
25
Q

Treynor

A

(Rp - Rf) / Bp

  • Measures return over systematic risk (beta)
  • Used to evaluate additions to portfolios
26
Q

Sharpe Ratio

A

(RP - Rf) / stdp

  • Excess return relative to total risk
  • Assumes returns are normally distributed
27
Q

M2 Measure

A

RF + [(RP - RF / stdp) * stdm]

^ Sharpe ratio

  • Value added/lost if portfolio had same std as market
  • Based on total risk
28
Q

Information Ratio

A

active return / active risk

RP - RB / [stdp - stdB]

29
Q

Quality Control Charts

A
  • Presents manager performance over time
  • Value added = 0 then goes above/below
  • Over time acceptance range narrows
30
Q

Quality Control Charts Errors

A
  • Type I - retaining poor manager
  • Type 2 = firing superior manager
31
Q

Manager Continuation Policies

A
  • Costly to hire/fire managers
    • New managers will make changes adding costs
  • Goals are to:
    • Retain best managers
    • Base decision off of more than just performance
    • Apply consistent procedures

CFA Level III (13 decks)

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