QFIP - 145: Determinants of Portfolio Performance

Question 1

Breakdown of Measurement of Portfolio Returns

Answer 1

1. Policy Return (Passive Portfolio Benchmark)
2. Policy and Timing Return
3. Policy and Security Selection Return
4. Actual Porfolio Return

Question 2

Policy Return

Answer 2

Question 3

Policy and Timing Return

Answer 3

This quadrant measures the effects of timing to achieve incremental returns

Question 4

Policy and Security Selection Return

Answer 4

Question 5

Actual Portfolio Return

Answer 5

Question 6

Framework for Performance Attribution (QFIP-145)

Answer 6

This framework differentiates between the effects of investment policy and investment strategy

• Investment policy is quantified by the policy return (Quad 1= Benchmark return)
• Investment strategy is composing of timing, security selection, and other

Question 7

Composition of active returns from the investment strategy (QFIP-145)

Answer 7

Question 8

Relative Importance of Different Performance Attribution Components

Answer 8

The reading performs a historical backtest of different funds to evaluate the relative importance of the return from investment policy versus the active return components of the investment strategy

• The study found that the investment policy return in Quadrant I explains the vast majority (> 90%) of the total variation in the returns of different funds
• The main conclusion is that a fund’s investment policy is the most important driver of future returns
• The different active return components, such as timing and selection, of the investment strategy do not matter as much