Reading 44: Evaluating Portfol....rmance－LOS f

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 16: Performance Evaluation and Attribution
Reading 44: Global Performance Evaluation
LOS f: Discuss the characteristics of alternative global and international benchmarks used in performance evaluation.

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For a global portfolio, the benchmark has to:

A) be a published index.

B) be consistent with the investment objective of the portfolio.

C) be custom defined by the manager of the portfolio.

D) have the same amount of risk as the portfolio under consideration.

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Answer and Explanation

The benchmark should be consistent with the investment objective of the portfolio.

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Which one of the following is NOT a consideration while forming a custom global benchmark?

A) Specification of the risk measure to be used for performance evaluation.

B) A currency hedging component.

C) Specification of the industry weights worldwide.

D) Style of the portfolio.

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Answer and Explanation

Custom benchmarks involve a variety of considerations including a currency hedging component (if desired), an industry weights component (bypassing the country weights) and sometimes just the style of the portfolio.

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For a global portfolio, why is a custom benchmark used?

A) Since the custom benchmark is created by the manager, it is more likely to be accepted.

B) A custom benchmark allows for an equal chance of over and under performance by the manager.

C) Published indices are not comparable to the portfolio.

D) A custom benchmark is more suitable for thinly traded international stocks.

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Answer and Explanation

Custom benchmarks are specified for a global portfolio because universally accepted indices may not be comparable to the portfolio.