Reading 47: Evaluating Portfolio Performance Los a~Q1-3 process, strategic, management, investment

youzizhang

 

LOS a: Justify the importance of performance evaluation to fund sponsors and investment managers.

Q1. In the management of a fund, performance evaluation is part of:

A)   the feedback step of the investment management process.

B)   the strategic decision-making step of the investment management process.

C)   the compensation computation of the investment management process.

 

Q2. With respect to the level of return and how the return was earned, performance evaluation should:

A)   not give an indication of either the level of return or how the return was earned.

B)   give an indication of both the level of return and how the return was earned.

C)   give an indication of the level of return but not how the return was earned.

 

Q3. June Spraker, CFA, manages a portfolio for a private family. In the recent update of the investment policy statement (IPS), the family has asked Spraker to increase the sophistication of her portfolio performance evaluation to give an exhaustive assessment of the risks to which the portfolio is exposed. The family insists on including the details of the evaluation process in the IPS. Their request is:

A)   not justified because portfolio performance evaluation should not be addressed in the IPS.

B)   justified because this is what the law requires, but the usefulness of the request is not clear.

C)   justified because there are a wide variety of ways investment returns can be earned with many types of risk exposures, and the details of the

youzizhang

 

LOS a: Justify the importance of performance evaluation to fund sponsors and investment managers. fficeffice" />

Q1. In the management of a fund, performance evaluation is part of:

A)   the feedback step of the investment management process.

B)   the strategic decision-making step of the investment management process.

C)   the compensation computation of the investment management process.

Correct answer is A)

Performance valuation is part of the feedback step.

 

Q2. With respect to the level of return and how the return was earned, performance evaluation should:

A)   not give an indication of either the level of return or how the return was earned.

B)   give an indication of both the level of return and how the return was earned.

C)   give an indication of the level of return but not how the return was earned.

Correct answer is B)

Performance evaluation is more than a simple exercise in calculating rates of return. Rather, it provides an exhaustive “quality control” check, emphasizing not only the performance of the fund and its constituent parts relative to objectives, but the sources of that relative performance as well.

 

Q3. June Spraker, CFA, manages a portfolio for a private family. In the recent update of the investment policy statement (IPS), the family has asked Spraker to increase the sophistication of her portfolio performance evaluation to give an exhaustive assessment of the risks to which the portfolio is exposed. The family insists on including the details of the evaluation process in the IPS. Their request is:

A)   not justified because portfolio performance evaluation should not be addressed in the IPS.

B)   justified because this is what the law requires, but the usefulness of the request is not clear.

C)   justified because there are a wide variety of ways investment returns can be earned with many types of risk exposures, and the details of the process should be in the IPS.

Correct answer is C)

Understanding how a return was earned is very important so that the manager can know if the fund had the correct exposures as specified in the IPS.

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a

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 d