R13 - Performance Mensurement Flashcards
Steps to performance mensurement (3)
What does an effective performance attribution process reflect?
100% of the portfolio’s return or risk exposure
This ensures that all aspects of the portfolio’s performance are accounted for.
What aspect of a portfolio manager’s work is included in an effective attribution process?
The portfolio manager’s current decision-making process
This helps in understanding how decisions impact performance.
What type of decisions are accounted for in an effective performance attribution process?
Active investment decisions taken by the portfolio manager
These decisions are crucial for analyzing performance.
An effective performance attribution process provides a full explanation of what?
The portfolio’s excess return and risk
This is essential for evaluating the effectiveness of investment strategies.
True or False: An effective attribution process can be relied upon for meaningful analysis.
False
Attribution that does not account for total risk and return cannot be relied upon.
Return attribution
Evaluates the impact of the active portifolio managment on overall portifolio return
Risk attribution
Active investment decisions on portifolio risk
Micro attribution
Managers level and intend to verify if pm did what they would and understand drivers portifolio return
Macro attribution
Quantifies if the decisions made are align with ssa
Describe the return, holding, transaction based atributions
F- Geométric return
Explain the Brison hood method
What’s the advancement on Brison Facher Method
More popular model
Tips teve difference between interaction effect and the ‘new’ allocation effect is that the delta return is against overall portifolio
Liability based benchmark
Usually Focus on cash flow required for pay liabilities.
Used assets include nominal bonds, inflation adj, high quality stocks.
Describe adv/disa of absolute bench
Adv
-Easily to compute;
Disa
- Not investable bench
Broad market indexes bench adv/disa
ADV
- well recognized, Easy to understand, and Widely avaliable
- unambigous
- apropriate if reflects the current inv process of the manager
Disa
- mgt style <> from indexe
Style indexes bench adv/disa
ADV
-Widely available
- appropriate if reflect managment style
Disa
- overconcetration in certain sec and sectors
- different definitions can produce quite <> bench returns
Factor model bench - adv/disa
ADV
- can capture insight of factor that produce return
Disa
- not intuitivelly
- no ready avaliable and May be expensive to obtain
-Diferent factor can produce diferent outputs
Return based bench adv/disa
ADV
- Easy and intuitive
- válid bench
Disa
- style indexes May not reflect managers own
- not applied to managers that change style
F- components of portifolio return
P=M+S+A
M- market índex
s- style
A- active return
Way to think as a sentence the pm choose style the apropriate índex and try to beat than
Apraissal measure objective
Assess whether the investment results due to skill or luck
F- Treynor ratio
Amount of return by systematic risk
F- info ratio
Amount of return agains bench vs. amount of Tracking risk
F- appraisal ratio
Active return for vol residual term
Tips
Residual term given formula bellow
Difference of sortino ratio vs. Sharpe
Sortino ignores ‘good’ vol (positive) by excluding into account.
Cumulative drawdown - describe how to calculate
Capture ratio explain
Determine the relative performance when market go up or down. When above one in a market that up, the manager performance was better that bench.
Sortino Ratio
Only consider the standard deviation of the downside risk.
Rt is the target rate return.
F-misfit return
Misfit return = normal benchmark - IPS benchmark
What’s the special atribute to sortino ratio
Assess performance when return distributions are not symmetrical
All actual, no fee paying, non discretionary must be included in composite. True or false
False.All actual, fee paying, discretionary must be included in composite.
Explain the difference between top down vs. bottow up relative attibutions
- Top-Down Relative Attribution
Approach: Starts at the aggregate (portfolio level) and drills down into sector and security contributions.
Focus: Evaluates high-level decisions such as asset allocation and broad investment strategy.
Key Components:
Asset Allocation Effect: Impact of overweighting or underweighting asset classes or sectors.
Selection Effect: Impact of security selection within sectors or asset classes.
Interaction Effect (Optional): Measures combined effects of allocation and selection.
Use Case:
Useful for portfolio managers and CIOs evaluating strategic allocation and sector positioning. - Bottom-Up Relative Attribution
Approach: Starts at the individual security level and aggregates contributions upward to determine total portfolio attribution.
Focus: Evaluates security selection decisions and their contribution to portfolio performance.
Key Components:
Security Selection Effect: Measures stock-picking skill within each sector or asset class.
Sector/Asset Group Aggregation: Aggregates individual security contributions to determine total excess return.
Use Case:
More relevant for equity analysts and active managers focusing on stock selection.
Example:
If a manager picks a specific tech stock that significantly outperforms, the Bottom-Up Attribution will allocate the excess return directly to security selection, rather than an overall sector bet.
