LOS b: Explain the basic components of portfolio evaluation (performance measurement, performance attribution, and performance appraisal).

Q2. The Campbell account is $5,000,000 at the beginning of January and $5,200,000 at the end of the month. During the month a contribution of $60,000 was received. What would be the rate of return on the account if the contribution was received on January 1, what would it be if the contribution was received on January 31?

January 1                     January 31

A)  2.77%                            4.00%

B)  4.00%                            2.80%

C)  2.77%                  2.80%

Q3. Which of the following is the most likely impact of receiving a contribution into an account at the beginning of the period as opposed to the end of the month?

A)   Return will be unaffected at the impact of the contribution has an equal impact on the numerator and denominator.

B)   Return will be lower because the impact on the numerator outweighs the impact of the contribution on the denominator.

C)   Return will be lower because the contribution is added to the assets in the denominator and reduces the size of the numerator.

Q4. What is the goal of performance appraisal?

A)   Identification of the sources of differences between portfolio and benchmark risk and return.

B)   Identification of overall risk and return.

C)   Interpretation of performance attribution.

Q5. In global performance evaluation, performance attribution seeks to:

A)   differentiate whether returns come from a manager’s luck or skill.

B)   measure the risk and return of the portfolio.

C)   identify the sources of difference between portfolio and benchmark return.

LOS b: Explain the basic components of portfolio evaluation (performance measurement, performance attribution, and performance appraisal). fficeffice" />

Q2. The ffice:smarttags" />Campbell account is $5,000,000 at the beginning of January and $5,200,000 at the end of the month. During the month a contribution of $60,000 was received. What would be the rate of return on the account if the contribution was received on January 1, what would it be if the contribution was received on January 31?

January 1                     January 31

A)  2.77%                            4.00%

B)  4.00%                            2.80%

C)  2.77%                  2.80%

Correct answer is C)

If the receipt was at the beginning of the period then:

If the receipt was at the end of the period then:

Q3. Which of the following is the most likely impact of receiving a contribution into an account at the beginning of the period as opposed to the end of the month?

A)   Return will be unaffected at the impact of the contribution has an equal impact on the numerator and denominator.

B)   Return will be lower because the impact on the numerator outweighs the impact of the contribution on the denominator.

C)   Return will be lower because the contribution is added to the assets in the denominator and reduces the size of the numerator.

Correct answer is C)

If you consider the calculation of return when a contribution is received at the beginning of the period, it is added to the opening market value. This increases the denominator, which is now opening market value plus the contribution. In the numerator, the addition of the contribution to the opening market value reduces the difference between this value and the closing value at the end of the month. There is a larger denominator and a smaller numerator. Therefore, return must be reduced.

Q4. What is the goal of performance appraisal?

A)   Identification of the sources of differences between portfolio and benchmark risk and return.

B)   Identification of overall risk and return.

C)   Interpretation of performance attribution.

Correct answer is C)

Performance appraisal involves the interpretation of performance attribution. A judgment is made about manager’s decisions and skill, in an effort to differentiate between returns attributable to luck and those attributable to skill.

Q5. In global performance evaluation, performance attribution seeks to:

A)   differentiate whether returns come from a manager’s luck or skill.

B)   measure the risk and return of the portfolio.

C)   identify the sources of difference between portfolio and benchmark return.

Correct answer is C)

Performance attribution seeks to identify the sources of difference between portfolio and benchmark return. Note that performance measurement involves the calculation of risk and return, while performance appraisal seeks to identify whether returns are a result of a manager’s luck or skill.

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