Reading 43: Evaluating Portfol....rmance－LOS m factor

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 16: Performance Evaluation and Attribution
Reading 43: Evaluating Portfolio Performance
LOS m: Discuss the use of fundamental factor models in micro performance attribution.

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Which of the following steps in the constructions of a suitable fundamental factor micro attribution is FALSE?

A) Determine the exposures of the portfolio and the benchmark to fundamental factors of the model at the start of the evaluation period.

B) Specify a benchmark.

C) Identify the fundamental factors that determine unsystematic returns.

D) Determine the performance of each of the factors.

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Answer and Explanation

It is necessary to determine the fundamental factors that determine the systematic (no unsystematic) returns. All the other statements are correct.

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Which of the following statements regarding fundamental factor model micro attribution is FALSE?

A) The main difference versus returns-based style analysis is that the fundamental factor model can incorporate factors that would not normally be included in returns-based style analysis.

B) The results will look very similar to a returns-based style analysis.

C) It will be necessary to identify the fundamental factors that will generate systematic returns.

D) The results will indicate the source of portfolio returns, based upon benchmark factor exposures versus the managers normal factor exposures.

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Answer and Explanation

The results will indicate the source of portfolio returns, based upon actual factor exposures (not benchmark) versus the managers normal factor exposures. All the other statements are true in the context of fundamental factor model micro attribution

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Which of the following would be least likely to be used in both returns based style analysis and fundamental factor model micro attribution?

A) The returns to a small-cap stock index.

B) The amount of leverage used in the fund.

C) The returns to a value stock index.

D) The sensitivities of the portfolio to index returns.

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Answer and Explanation

Both returns based style analysis and fundamental factor model micro attribution would utilize the returns to various indices as well as the sensitivities to the indices. However, returns based style analysis would not examine fundamental factors such as the leverage in the fund and the size of the stocks in the fund.