Reading 44: Evaluating Portfol....rmance－LOS e budgeting

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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 e: Explain the use of risk budgeting in global performance evaluation.

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What is risk budgeting?

A) Determination of the amount of risk the portfolio can take.

B) Identification of sources of portfolio risk.

C) Determination of a risk measure that the portfolio can take.

D) Comparison of the funds risk to that of its return.

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Answer and Explanation

Risk budgeting is the risk counterpart of performance attribution. It identifies the sources of the portfolio risk.

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Sector risk is defined as the risk of:

A) all the sectors in the portfolio.

B) all companies in a portfolio.

C) assigning the wrong weight to a sector in the portfolio.

D) individual countries in a passive benchmark portfolio.

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Answer and Explanation

Sector risk is the risk of individual countries or sectors in a passive benchmark portfolio.

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Selection risk is defined as the:

A) risk of all the companies in a sector of the portfolio.

B) risk of all the sectors in a portfolio.

C) risk of individual companies in a sector in the benchmark portfolio.

D) additional risk taken by deviating from the benchmark portfolio.

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Answer and Explanation

Selection risk is the additional risk taken by deviating from the benchmark portfolio.