Reading 24 - Portfolio Performance Evaluation

Question 1

performance appraisal

Answer 1

determines whether performance was affected primarily by investment decisions, by the overall market, or by chance. combined output from both performance measurement and attribution to render a professional judgement on the quality of performance. if a fund’s performance is attributed to luck, can expect PM to exhibit same returns in the future

Question 2

Performance Attribution

Answer 2

determines the key drivers that generated the account’s performance. expands on the risk and return that was quantified through performance measurement and explains how the return was achieved given the risk taken by the portfolio manager. performance attribution can explain both relative and absolute returns

Question 3

return attribution

Answer 3

evaluates the impact of active portfolio management decisions on the fund’s investment returns

Question 4

risk attribution

Answer 4

parallel of return attribution but analyzes the impact of portfolio manager’s active investment decisions on portfolio risk

Question 5

micro attribution

Answer 5

analyzes the portfolio at the portfolio manager’s level and seeks to verify that the portfolio manager did what they said they would and to understand the drivers of the portfolio’s return

Question 6

macro attribution

Answer 6

analyzes investment decisions at the fund sponsor’s level - commonly used with institutional investing. macro attribution quantifies the fund sponsor’s decisions to deviate from their strategic asset allocation and the timing when they made those decisions.

Question 7

Approaches for conducting performance attribution

Answer 7

1. returns based
2. holdings based
3. transactions based

Question 8

Returns based attribution

Answer 8

regresses total portfolio returns against major risk factors eg systematic risk, size and value to identify the active bets of the manager and their impact on active returns

Question 9

holdings based attribution

Answer 9

uses beginning of period portfolio holdings to assess the active sector and stock selection bets of the manager and their contribution to active return.

this method does not adjust for portfolio changes made during the evaluation period; hence, the output may not fully reconcile to overall portfolio returns for a manager with high turnover. this mismatch is referred to as “timing” or “trading” effect, which can be reduced by using shorter evaluation periods.

Question 10

transactions based attribution

Answer 10

improves upon holdings based attribution by including impact of any trades executed during the evaluation period