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CFA L3 > Performance Measurement (10.31.24) > Flashcards

Performance Measurement (10.31.24) Flashcards

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1
Q

Ex post vs ex ante

A

ex post - looking back in time
ex ante - looking forward in time

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2
Q

Performance attribution

A

The process of disaggregating a portfolio’s return to determine the drivers of its performance

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3
Q

Return attribution

A

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

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4
Q

Macro vs. Micro attribution

A

macro - measures the effect of the sponsor’s choice to deviate from the strategic asset allocation

micro - measures the impact of pm’s allocation and selection decisions on total fund performance

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5
Q

Returns-based attribution

A

Uses only the total portfolio returns over a period to identify the components of the investment process that have generated returns (Brinson-Hood-Beebower)

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6
Q

when is returns based attribution appropriate

A

when the underlying portfolio holding information is not available with sufficient frequency at the required level of detail

hedge funds, for example, because it can be difficult to obtain the underlying holdings

easiest to implement, but least accurate

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7
Q

Holdings-based attribution

A

“Buy and hold” 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

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8
Q

when is holdings-based attribution most appropriate

A

for investment strategies with little turnover (passive strategies)

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9
Q

Transactions-based attribution

A

Captures the impact of intra-day trades and exogenous events such as significant class action settlement

most accurate, but most difficult to obtain

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10
Q

Geometric attribution

A

(1+R) / (1+B) - 1
OR
(R-B) / (1+B)

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11
Q

relationship between geometric excess return and arithmetic excess return

A

geometric = arithmetic divided by wealth ratio of the benchmark (1 + return on benchmark during the period)

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12
Q

Security selection answers which question

A

Was the return achieved by selecting securities that performed well relative to the benchmark or by avoiding benchmark securities that performed relatively poorly?

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13
Q

Asset allocations answers which question

A

Was the return achieved by choosing to overweight an asset category (e.g., economic sector or currency) that outperformed the total benchmark or to underweight an asset category that underperformed the total benchmark?

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14
Q

Interaction effect

A

The impact of overweighting and underweighting individual securities within securities that are themselves overweighted or underweighted

I = (w-w(b)) * (r-r(b))

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15
Q

BHB Model

A

Built on the assumption that the total portfolio and benchmark returns are calculated by summing the weights and returns of the sectors within the portfolio

Selection and allocation do not completely explain the arithmetic difference, interaction explains the third attribution effect

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16
Q

BF Model

A

All overweight positions in sectors with positive returns will generate positive allocation effects irrespective of the overall benchmark return, whereas all overweight positions in negative markets will generate negative allocation effects

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17
Q

Carhart four factor model

A

1) Market
2) Size
3) Value
4) Momentum

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18
Q

3 Approaches to fixed income attribution

A

1) Exposure decomposition (duration based)
2) Yield curve decomposition
(duration based)
3) Yield curve decomposition (full repricing based)

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19
Q

Exposure Decomposition

A
  • (Duration Based)
  • Top-down attribution approach that seeks to explain the active management of a portfolio relative to its benchmark
  • Includes portfolio duration bets, yield curve positioning, sector bets (all relative to benchmark)
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20
Q

Yield Curve Decomposition

A
  • (Duration based)
  • Can be top-down approach or bottom up from security level, estimating the return of securities, sector buckets, or YTM buckets

%Total return = % Income return + % Price return

% Price return = -Duration * Change in YTM

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21
Q

Duration

A

measures the sensitivity of bond price to a change in the bond’s YTM

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22
Q

Yield Curve Decomposition

A
  • (Full Repricing)
  • Bottom up approach that is more precise and allows for broader range of instrument types and yield changes
  • Reprices bonds from zero-coupon curve (spot rates)
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23
Q

Common measure of risk when portfolios are managed against benchmarks

A

Tracking risk

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24
Q

7 Types of Benchmarks

A

1) Absolute return benchmark
2) Broad market index
3) Style index
4) Factor-model-based benchmark
5) Returns-based (Sharpe) benchmark
6) Manager universes (peer groups)
7) Custom security-based (strategy) benchmark

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25
Q

Absolute return benchmark

A

a minimum target return that an investment manager is expected to beat

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26
Q

Broad market index

A

Measures of broad asset class performance; well known, readily available, and easily understood

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27
Q

Investment style index

A

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

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28
Q

Factor-model-based benchmarks

A

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

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29
Q

Returns based benchmarks (Sharpe style analysis)

A

Benchmarks constructed by examining a portfolio’s sensitivity to a set of factors, such as the returns for various style indexes

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30
Q

Manager universe

A

a broad group of managers with similar investment disciplines; also called manager peer group

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31
Q

Custom security-based benchmark

A

Custom built to accurately reflect the investment discipline of a particular investment manager

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32
Q

Criteria that a benchmark must satisfy to be valid in use

A

1) Unambiguous - clearly identifiable
2) Investable
3) Measurable
4) Appropriate
5) Reflective of current investment opinions
6) Specified in advance
7) Accountable

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33
Q

Sharpe ratio

A

The ratio of mean excess return to standard deviation (excess return)

(Return - risk free rate) / standard deviation

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34
Q

Treynor Ratio

A

Measures the excess return per unit of systematic risk

(return - risk free rate) / beta

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35
Q

When is treynor ratio useful

A

when the portfolios being compared as using the same benchmark index

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36
Q

Information ratio

A

Assesses performance relative to the benchmark, scaled by risk

(return portfolio - return benchmark) / (portfolio StD - benchmark StD)

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37
Q

Appraisal ratio (Treynor-Black Ratio)

A

Annualized alpha divided by the annualized residual risk, which are both computed from a factor regression

alpha/standard error of regression

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38
Q

Sortino Ratio

A

modification of sharpe ratio that penalizes only those returns that are lower than a user-specified return

(return - user-specified return) / risk

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39
Q

Drawdown

A

a percentage peak-to-trough reduction in net asset value

the loss in vale incurred in any continuous period of negative returns

40
Q

Capture ratio

A

Measures the manager’s participation in up and down markets

upside capture / downside capture

Upside capture greater than 100% signifies outperformance (convex return profile)

downside capture less than 100% signifies outperformance (concave return profile)

41
Q

Investment due diligence key points

A

1) Philosophy
2) Process
3) People
4) Portfolio

42
Q

Operational due diligence key points

A

1) Process and procedure
2) Firm
3) Investment vehicle
4) Terms
5) monitoring

43
Q

Type I Error in manager hiring

A

Hiring or retaining a manager who subsequently underperforms expectations

rejecting the null of no skill when it is correct

44
Q

Type II error when hiring a manager

A

Not hiring or firing a manager who subsequently outperforms, or performs in line with, expectations

not rejecting the null when it is incorrect

45
Q

Which type error is associated with explicit costs

A

Type I error

46
Q

Which type error is associated with opportunity costs

A

Type II error

47
Q

The difference in expected cost between Type I and Type II error vs. perceived difference between distribution of skilled and unskilled managers

A

lower the smaller the perceived difference between the distribution of skilled and unskilled managers

48
Q

Returns-based style analysis (RBSSA)

A

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

49
Q

Holdings-based style analysis (HBSA)

A

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

50
Q

Drawdown duration

A

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

i.e. drawdown duration of 4 months means portfolio lost money and recovered in 4 months

51
Q

Active share

A

a measure of how similar a portfolio is to its benchmark

a manager who precisely replicates the benchmark will have an active share of zero

a manger with no holdings in common with the benchmark will have an active share of one

52
Q

High tracking risk + low active share

A

sector rotation

53
Q

High tracking risk + high active share

A

concentrated stock pickers

54
Q

Low tracking risk + low active share

A

closet indexer

55
Q

Low tracking risk + high active share

A

Diversified stock pickers

56
Q

Risk premiums

A

extra returns expected by investors for bearing some specified risk

57
Q

Two categories of market inefficiencies

A

1) Behavior
2) Structural

58
Q

Behavior inefficiencies

A

Perceived mispricings created by the actions of other market participants, usually associated with biases, such as trend following or loss aversion

temporary, lasting long enough for the manager to identify and exploit them before the market price and perceiving intrinsic value converge

59
Q

Structural inefficiencies

A

Perceiving mispricings created by external or internal rules and regulations

can be long lived and assume a continuation of the rules and regulations rather than a convergence

60
Q

Key person risk

A

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

61
Q

Groupthink

A

Behavioral bias that occurs when a team minimizes conflict and dissent in reaching and maintaining a consensus

62
Q

Authority bias

A

Behavioral bias which involves groups deferring to a group member that is a subject matter expert or in a position of authority

63
Q

Aversion of complexity

A

A behavior bias in which disproportionate attention is given to trivial issues at the expense of important but harder-to-grasp or contested topics

64
Q

3 keys of information to exploiting inefficiencies in the market

A

1) Unique
2) Timely
3) Interpreted differently

65
Q

4 Elements of the investment decision-making process

A

1) Signal creation
2) Signal capture
3) Portfolio construction
4) Portfolio monitoring

66
Q

what conclusions does performance attribution draw regarding the quality of a portfolio manager’s investment decisions

A

none

67
Q

For top down investment approach, what is the most appropriate risk attribution approach

A

attribute tracking risk to allocation and selection decisions relative to the benchmark

68
Q

target semi-standard deviation (target semideviation)

A

denominator of the sortino ratio

(average portfolio return - MAR) / sortino ratio

MAR = minimum acceptable return

69
Q

what capture ratio indicates convex return profile

A

capture ratio greater than 1

70
Q

what capture ratio indicates concave return profile

A

capture ratio less than 1

71
Q

Why can holdings-based attribution generate a residual term between the portfolio performance and benchmark performance

A

1) Timing of transactions
2) Price differences
3) Reinvestment of cash flows
4) Market movements

in other words, not by the the fund manager’s actions

72
Q

two common approaches for equity attribution

A

1) brinson - fachler
2) factor-based attribution

73
Q

Brinson model

A

widely used performance attribution model to understand the sources of a portfolio’s returns relative to a benchmark; three main components

1) Allocation effect: impact of pm’s decisions to allocate assets differently from the benchmark

2) Selection effect: pm’s ability to select securities within each sector

3) Interaction effect: combined impact of allocation and selection effect, which can sometimes offset each other

74
Q

Allocation effect

A

(portfolio weight - benchmark weight) * (benchmark return for that category - total benchmark return)

75
Q

Selection + Interaction effct

A

benchmark weight * (portfolio return - benchmark return) + (portfolio weight - benchmark weight) * (portfolio return - benchmark return)

76
Q

return due to manager style

A

S = B - M

S = return due to manager style
B = return on the benchmark portfolio
M = return on the appropriate market index

77
Q

Performance appraisal

A

indicates whether the portfolio’s performance was achieved through manager skill or through luck

78
Q

Qualitative consideration most associated with determining whether investment manager selection will result in superior repeatable performance

A

investment process

79
Q

when is style analysis most useful

A

when applied to strategies that hold publicly traded securities where pricing is frequent

80
Q

4 main advantages of SMA

A

1) Ownership
2) customization
3) tax efficiency
4) Transparency

81
Q

3 main disadvantages of SMA

A

1) Cost
2) Tracking risk
3) Investor behavior

82
Q

pooled investment

A

fund where multiple investors combine money to invest together

ETFS and mutual funds

83
Q

components of qualitative analysis

A

1) Investment due diligence
2) Operational due diligence

84
Q

investment due diligence

A

Which manager “best fits the portfolio need?

1) Philosophy
2) Process
3) People
4) Portfolio

85
Q

Operational due diligence

A

Is the manager’s track record accurate, and does it fully reflect risks?

1) Process and procedure
2) Firm
3) Investment vehicle
4) Terms
5) Monitoring

86
Q

aspects of quantitative analysis

A

What has been the manager’s return distribution?

1) Attribution and appraisal: has the manager displayed skill?

2) Capture ratio: how does the manager perform in “up” markets versus “down” markets?

3) Drawdown: does the return distribution exhibit large drawdowns?

87
Q

Which error type is an error of mistaken rejection

A

Type I

88
Q

Which error type is an error of failing to detect a true relationship

A

Type II

89
Q

Which error type is more easily measured

A

Type II

90
Q

Which error type is linked to the compensation of the decision maker

A

Type I

91
Q

which style analysis is subject to window dressing

A

HSBA because it is a snapshot of the portfolio at a single point of time

92
Q

which style analysis is comparable across managers and to itself across time

A

returns based because it is able to identify the important drivers of return and the relevant risk factors for the period analyzed, even for complicated strategies

93
Q

style analysis top down vs bottom up approach

A

bottom up - holdings based
top down - returns based

94
Q

soft lock

A

provision that allows investors to redeem their shares during the lock-up period, but with certain restrictions or penalties

95
Q

which fee structure decreases the volatility of a portfolio’s net returns

A

incentive fees because they are charged as a % of returns, reducing net gains in positive months and net losses in negative months

96
Q
A

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