Reading 43: Evaluating Portfolio Performance－LOS b basic

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

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In global performance evaluation, performance attribution seeks to:

A) measure the risk and return of the portfolio.

B) measure the risk and return of individual sectors in the portfolio.

C) differentiate whether returns come from a managers luck or skill.

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

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Answer and Explanation

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 managers luck or skill.

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What is the goal of performance appraisal?

A) Interpretation of performance attribution.

B) Identification of overall risk and return.

C) Identification of sector risk and return.

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

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Answer and Explanation

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