Malcolm O’Kelly Case Scenario
Malcolm O’Kelly is a performance evaluation consultant working for the Board of Trustees of the Rutherford University (RU) Pension Fund. The Board has asked O’Kelly to conduct a macro attribution analysis for the pension fund. O’Kelly gathered the data shown in Exhibit 1 and Exhibit 2. The one-month return on a U.S. Treasury bill is 0.41 percent.
The Board is considering adding Cottonwood Equity Advisors as their third domestic equity manager. In their proposal to the Board, Cottonwood claims to generate positive alpha by overweighting sectors that they expect will outperform the overall benchmark portfolio. Cottonwood also attempts to enhance overall return by overweighting securities their analysts have identified as undervalued. The Board asked O’Kelly to perform a micro attribution analysis of Cottonwood’s equity portfolio. O’Kelly’s analysis is shown in Exhibit 3.
The discussion then turns to fixed-income attribution analysis. Board member Carolyn
Tripp asks O’Kelly about the determinants of fixed-income portfolio returns. O’Kelly responds that fixed-income portfolio returns can be attributed to an external interest rate effect and the management effect. Then Tripp asks O’Kelly about analyzing the management effect. O’Kelly responds that the management effect can be decomposed into the following components:
? Interest rate management effect : indicates how well the manager predicts interest rate changes. Each security must be priced as a default-free security. Then the Treasury bill rate is added to the returns on the repriced securities to obtain the interest rate management effect.
? Sector/quality effect : measures the manager’s ability to select outperforming sectors and quality groups. The sector/quality return is estimated by repricing each security in the portfolio using the average yield premium in its respective category. A gross return can be then calculated based on this price. The return from the sector/quality effect is calculated by subtracting the external effect and the interest rate management effect from this gross return.
? Security selection effect: measures how the return on specific securities within a sector relates to the average performance of the sector. The security selection effect for each security is the total return for that security less all the other components. The portfolio’s security selection effect is the arithmetic average of all the individual security selection effects.
? Trading activity : measures the effect of sales and purchases of securities and is calculated as the total portfolio return less all the other components.
25. Based on a macro attribution analysis of the information given in Exhibits 1 and 2, the incremental return contribution attributed to the Asset Category investment strategy is closest to:
A. –0.09%.
B. 3.48%.
C. 3.89%.
Answer: B
“Evaluating Portfolio Performance,” Jeffrey V. Bailey, CFA, Thomas M.
Richards, CFA, and David E. Tierney 2009 Modular Level III, Volume 6, pp. 144-146 Study Session 17-47-l Demonstrate, justify, and contrast the use of macro and micro performance attribution methodologies to evaluate the drivers of investment performance. The incremental return attributed to the asset category investment strategy is calculated as follows:
Where is the incremental return contribution of the asset category investment strategy, is the return on the ith asset category, is the risk-free return, is the policy weight assigned to the ith asset category, and A is the number of asset categories. In this case, the incremental return attributed to the asset category investment strategy is:
= 0.7 × (4.46 – 0.41) + 0.3 × (2.56 – 0.41) = 3.48% where 0.41% is the monthly risk-free rate. See Equation 47-10 (p.145)
26. Based on a macro attribution analysis of the information given in Exhibits 1 and
2, the incremental return contribution attributed to misfit return (i.e., style bias) is closest to:
A. –0.09%.
B. 0.08%.
C. 0.32%.
Answer: A
“Evaluating Portfolio Performance,” Jeffrey V. Bailey, CFA, Thomas M. Richards, CFA, and David E. Tierney 2009 Modular Level III, Volume 6, pp. 146-147 Study Session 17-47-l Demonstrate, justify, and contrast the use of macro and micro performance attribution methodologies to evaluate the drivers of investment performance.
The aggregate manager benchmark or misfit return is calculated as follows:
Where is the incremental return contribution of the Benchmarks strategy, is the return of the jth manager’s benchmark in asset category i, is the return on the ith asset category, is the policy weight assigned to the ith asset category, is the policy weight assigned to the jth manager in asset category i, and A and M are the number of asset categories and managers, respectively. The misfit return is – 0.09% calculated as follows:
= 0.7 × 0.6 × (4.61 – 4.46) + 0.7 × 0.4 × (4.31 – 4.46) + 0.3 × 0.65 × (1.99 – 2.56) + 0.3 × 0.35 × (2.55 – 2.56) = –0.09% See Equation 47-11 (p.146)
27. Based on a macro attribution analysis of the information given in Exhibits 1 and 2, the incremental return contribution attributed to the investment managers is closest to:
A. –0.09%.
B. 0.08%.
C. 0.49%.
Answer: B
“Evaluating Portfolio Performance,” Jeffrey V. Bailey, CFA, Thomas M. Richards, CFA, and David E. Tierney 2009 Modular Level III, Volume 6, pp. 147-148 Study Session 17-47-l Demonstrate, justify, and contrast the use of macro and micro performance attribution methodologies to evaluate the drivers of investment performance.
The incremental return contribution of the investment manager is calculated as follows:
Where is the incremental return contribution of the investment managers, is the return on the jth manager’s portfolio within asset category i, is the return of the jth manager’s benchmark in asset category i, is the policy weight assigned to the ith asset category, is the policy weight assigned to the jth manager in asset category i, and A and M are the number of asset categories and managers, respectively. In this case, return attributable to the investment managers is 0.08% calculated as follows:
= 0.7 × 0.6 × (4.84 – 4.61) + 0.7 × 0.4 × (4.10 – 4.31) + 0.3 × 0.65 × (1.72 – 1.99) + 0.3 × 0.35 × (3.43 – 2.55) = 0.0775% ≈ 0.08%
See Equation 47-12 (p.147)
28. Based on the micro attribution analysis presented in Exhibit 3, which part or parts of Cottonwood’s strategy most likely succeeded?
A. Sector selection.
B. Securities selection.
C. Neither securities nor sector selection.
Answer: B
“Evaluating Portfolio Performance,” Jeffrey V. Bailey, CFA, Thomas M.
Richards, CFA, and David E. Tierney 2009 Modular Level III, Volume 6, pp. 150-154 Study Session 17-47-l Demonstrate, justify, and contrast the use of macro and micro performance attribution methodologies to evaluate the drivers of investment performance. The Pure Sector Allocation column total of –0.035 indicates that Cottonwood was not successful during the period in regard to its sector selection strategy. If that strategy were successful, the column total would have been positive and large relative to the portfolio’s Total Value Added. However, Cottonwood was successful in selecting securities within sectors as evidenced by the Within Sector Allocation total of 0.451. This was the driver of the portfolio’s Total Value Added before expenses of 0.424.
29. O’Kelly’s descriptions of the interest rate management effect and sector/quality effect are most likely correct with respect to:
A. both effects.
B. the interest rate management effect but not the sector/quality effect.
C. the sector/quality effect but not the interest rate management effect.
Answer: C
“Evaluating Portfolio Performance,” Jeffrey V. Bailey, CFA, Thomas M.
Richards, CFA, and David E. Tierney 2009 Modular Level III, Volume 6, page 159 Study Session 17-47-o Explain the management factors that contribute to a fixed-income portfolio’s total return and interpret the results of a fixed-income performance attribution analysis.
O’Kelly’s description of the interest rate management effect is incorrect. It should be calculated by subtracting the return of the entire Treasury universe from the aggregate return of the repriced securities. The description of the sector/quality effect is correct.
30. O’Kelly’s descriptions of the security selection effect and trading activity are most likely correct with respect to:
A. both.
B. the security selection effect, but not the trading activity.
C. the trading activity, but not the security selection effect.
Answer: C
“Evaluating Portfolio Performance,” Jeffrey V. Bailey, CFA, Thomas M.
Richards, CFA, and David E. Tierney 2009 Modular Level III, Volume 6, page 159 Study Session 17-47-o Explain the management factors that contribute to a fixed-income portfolio’s total return and interpret the results of a fixed-income performance attribution analysis.
O’Kelly’s description of the security selection effect being an “arithmetic average” is incorrect. The portfolio’s security selection effect is the market-value weighted average of all the individual security selection effects. The description of trading activity is correct.
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发表于 2009-7-2 16:01
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