Section 5 - R26 - Portfolio Performance Evaluation Flashcards
Performance Measure (Concept)
How was the portfolio’s performance?
- Absolute performance
- In excess over a benchmark return
Performance Attribution (Concept)
How was the portfolio performance achieved?
- Explain
- What portion was due to active manager decisions
- Decompose excess return and risk
Performance Appraisal (Concept)
Was the performance achieved through manager skill or luck?
It assesses the quality of a portfolio performance
Question: An EFFECTIVE performance attribution must… (List)
- Account for all of the portfolio’s risk and return
- Reflect the investment decision-making process
- Quantify the active decisions of the portfolio manager
- Provide a complete understanding of the excess risk / return
Performance Attribution Aspects in terms of Risk and Return (Explain)
- Return Attribution: Impact of active investment decisions on returns
- Risk Attribution: Analyzes the risk consequences of those decisions
Types of Performance Attribution (List and Explain)
- Returns Based: Easy. Uses Portfolio’s Total Return (over a period) + Identifies its sources.
- Holdings Based: Beggining of Period Holdings. All transactions assumed to occur at end of day. Accuracy improves when data has shorter intervals.
- Transactions Based: Holdings + Transactions -> Accurate trade results
a. Returns Based Attribution (Detail)
- Uses Total Portfolio Return
- Appropriate when underlying holdings information is not available
- Easy to implement
- Least Accurate
- Most vulnerable to data manipulation
b. Holdings Based Return (Detail)
- References beginning of period portfolio
- Fails to capture transaction data
- Most appropriate if turnover is low
c. Transactions Based Return (Detail)
- Uses both Holdings + Transactions info during specified period
- Most accurate, most difficult and time consuming to implement
Micro Attribution (Concept)
Drivers do retorno do manager + se estão consistentes com o processo de investimento
Macro Attribution (Concept)
Asset Owner’s tactical asset allocation and manager selection
+ Effect of the manager selection and timing decisions
(Vontade do dono em fugir do plano estratégico / SAA)
(a) Equity Attribution Measurement Approaches
- Brinson Hood Beebower (BHB):
- Brinson-Fachler (BF):
- Diferença: Alocação
- BF considers (ΔPw-Bw)*(rb-Rb)
- Exemplo: no BF, se eu over-aloquei em algo que performou mal, mas MENOS MAL que o benchmark, meu “valor adicionado” será positivo.
Differentiate BHB e BF
BHB: Allocation from an absolute (+) or (-) perspective
BF: Allocation from a relative perspective versus a total benchmark return
(b) Factor-Based Models (Concept)
- Decompose contributions to excess returns from factors
Carhart:
(Rp-Rf) = + b1RMRF + b2SMB + b3HML + b4WML + Erro
(c) Fixed Income Attribution Approaches (List)
- Exposure Decomposition: Top down. Compare various items against benchmark (duration, yield curve, sectors, active decisions).
- Yield Curve Decomposition: Duration based. Estimate impacts of ΔYield in Portfolio v. ΔYields impact in Benchmark
a. Calculate Total Return = % Income + % Price Change
Price Change = -ModDur*ΔYield
b. Difference = Effect of Active PM decisions
c. Yield Curve Decomposition
- Yield Curve Decomposition: Full Repricing
(c.1) Fixed Income: Exposure Decomposition (Describe)
Top down approach. Explain active management through a hierarchy of decisions from the top to the bottom.
(c.2) Fixed Income: Yield Curve Decomposition (Duration Based)
Duration based. Top-down or bottom up.
a. Calculate Total Return = % Income + % Price Change
Price Change = -ModDur*ΔYield
b. Difference = Effect of Active PM decisions
c. Yield Curve Decomposition
(c.3) Fixed Income: Yield Curve Decomposition (Full Repricing)
- Reprecifies all securities given ΔYield that actually happened (instead of estimates)
- Measure impact of those changes in portfolio’s returns
Note: Most complex
Risk Attribution
a. Absolute Mandates: identifies sources of volatility
b. Benchmark Relative: Identifies sources of tracking risk
Investment Decision Making Process: BOTTOM UP
BOTTOM UP: Contribuição Marginal, sempre
a. RELATIVE: p/ o Tracking Risk (Desvio do Benchmark)
b. ABSOLUTE: p/ o Total Risk
Investment Decision Making Process: TOP DOWN
Top Down: Attribute tracking risk to relative allocation and selection decision
Investment Decision Making Process: FACTORS BASED
Factors marginal contribution to (a) tipo de risco e (b) tipo de risco específico
RELATIVE: Tracking Risk + “ACTIVE” Specific Risk
ABSOLUTE: Total Risk + Specific Risk (não idiossincrático)
Macro Attribution: Sponsor Level (List)
Decision 1: Deviations from the SAA
Decision 2: Selection of investment managers
Tracking Risk (Concept)
Risco em relação ao benchmark. Relativo.
Specific Risk (Concept)
Risco idiossincrático do portfolio (único)
Active Specific Risk (Concept)
Subset do specific risk relativo a risco ativo de decisões do benchmark
Benchmarks (Concept)
Collection of securities that represents assets available to the PM.
Market Index Benchmark (Concept)
Benchmark that represents the performance of a specific security market, market segment or an asset class.
Liability Based Index Benchmark (Concept)
Benchmark focused in the cashflows that an asset must generate
Valid Benchmark Properties (List)
- Unambiguous (Securities/Weights Clearly Identified)
- Investable (Replicable)
- Measurable (On frequent / timely basis)
- Appropriate (Consistent with PM’s Style)
- Reflective of Current Investment Opinions
- Specified in Advance
- Accountable (Manager should accept it)
Asset Based Benchmark Types (List)
- Absolute Benchmark Return
- Broad Market Indexes
- Style Indexes
- Factor Based Model Benchmarks
- Returns Based (Regressão)
- Manager Universe (Peer)
- Customs Security Based
Absolute Benchmark Return (Concept)
Ex: 5% de retorno anual
Cons:
- Not investable
Broad Market Indexes (Concept)
Ex: S&P 500
Pros: Easy recognition, understandable, widely available
Cons: Inappropriate if PM deviates
Style Indexes (Concept)
Ex: Value S&P 500
Pros: Often well known, easy to understand, widely available
Factor Based Model Benchmarks (Concept)
- Ambiguous
- Not specified in advance
- May not be investable
Benchmark Quality (Formula)
(i) P = B + A
(ii) P = M + (B-M) + A
(iii) P = M + S + A
P = Portfolio
B = Benchmark
A = Active Decisions = (P-B)
B = Market + Style (B-M)
S = Style = (B-M)
Challenges: Benchmark Alternative Investments (List)
- Lack of investable market indexes
- Usage of Leverage
- Limited Liquidity
- Lack of readily available market values
Benchmark to Hedge Funds (List)
- Broad indexes not suitable
- Rf + Spread is sometimes used
- Fund Manager Universe may be used
Cons:
- Risk and return of benchmark not representative
- Survivorship and backfill bias
- HF performance is self reported
Real Estate Benchmark (List)
- Numerous indexes
Cons: - Not representative
- Subsets of asset class
- Returns and values are smooth / based in appraisal data
- Performance correlated with largest assets
- Lag
Private Equity Benchmark (List)
Mostly peer group benchmarks
Cons:
- Valuation
- Funds IRR depends a lot on timing of cashflows
Commodity Investments Benchmark (List)
- Indexes based in futures
- Vary greatly in composition and weight
- Actual funds use leverage
Managed Derivatives Benchmark (List)
- Specific to a single investment strategy
Distressed Securities (List)
- Illiquid
- Hard to construct an index
True Active Return (Formula)
True Active Return = P - Normal Portfolio
P = Portfolio Manager Return
Misfit Active Return (Formula)
Misfit Active Return = (P - Investor Benchmark)
Investor Benchmark = Named in SAA
Appraisal Measures (List)
- Sharpe
- Sortino
- Treynor
Sharpe Ratio (Formula)
Sharpe = (Rp - Rf)/σ portfolio
Treynor Ratio (Formula)
Treynor = (Rp - Rf)/β
Uses systematic risk. For well diversified portfolios.
Information Ratio (Formula)
IR = (Rp - Rbenchmark) / σativo
IR = Ractive / σativo
Appraisal Ratio (Formula)
AR = α / σe
α = alpha = b0 da regressão = intercepto
σe = desvio-padrão do resíduo
Sortino Ratio (Formula)
Sortino = Rp-Rt / σd
Rt = Target Return
σd = Semi Deviation = Std Deviation of Downside Risk
Sortino Ratio Usage (List)
- Better for Hedge Funds and Commodity Trading
- Usage of Semi Deviation (only downside risk)
Capture Ratios (Concept & Formula)
Capture Ratio = UC / DC
If > 1 é positive / convex
If < 1 é negative / concave
UC = Rportfolio / R bench
DC = Rportfolio / R bench
sendo,
UC = Upside Capture if Rbench > 0
DC = Downside Capture if Rbench < 0
Mede assimetria da captura do upside em relação ao downside
