Reading 43: Evaluating Portfolio Performance－LOS c,(Part return, contrast, interpret

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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 c, (Part 1): Calculate, interpret, and contrast time-weighted and money-weighted rates of return.

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Which of the following least accurately characterizes the time-weighted return? The time-weighted return:

A) is similar to the internal rate of return.

B) is most appropriate for a manager who cannot control the timing of the cash flows in and out of the fund.

C) requires account valuation whenever an external cash flow takes place.

D) can be expensive and error prone.

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Answer and Explanation

The time-weighted return is not similar to the internal rate of return. The money-weighted return is similar to the internal rate of return and is also known as the linked internal rate of return. The other responses accurately characterize the time-weighted return.

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For a global portfolio, the money-weighted returns for the four quarters of last year are: 3 percent, -2 percent, 5 percent, and 2.5 percent. The corresponding time-weighted returns are: 2.5 percent, -1 percent, 4 percent, and 3.5 percent. What would an investor report as the annual rate of return on the portfolio?

A) 9.23%.

B) 8.64%.

C) 8.50%.

D) 9.0%.

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Answer and Explanation

For reporting purposes, time weighted return is reported. Annual return = 1.025 * 0.99 * 1.04 * 1.035 - 1 = 0.0923 or 9.23%.

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What is the major difference between the money-weighted and time-weighted rate of return? The money-weighted return:

A) captures the weights of all the currencies in the portfolio while the time-weighted return does not.

B) computes the return more precisely using the internal rate of return computation while time-weighted return computation is an approximation.

C) penalizes managers for cash flows that occur outside of their control while the time-weighted return does not.

D) is averaged across periods to arrive at an annual rate of return while the time-weighted return is compounded across periods to arrive at an annual rate of return.

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Answer and Explanation

The time-weighted return is computed every time a cash flow occurs, so it does not penalize managers for cash flows that occur outside of their control. The money-weighted return, on the other hand, is impacted by cash flows. Note that an approximation for different time periods can be made when using the time-weighted return, however, using an approximation would be at the discretion of the person calculating the return and is not part of the methodology behind the time-weighted return calculation.

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The money-weighted return measures the:

A) total return during the period.

B) return of the portfolio relative to the amount of risk incurred.

C) return per unit of domestic currency.

D) return on the average investment during the period.

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Answer and Explanation

The money-weighted return measures the return on the average investment during a specific time period. The money-weighted return computation uses the concept of an internal rate of return.

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The time-weighted return measures the:

A) total return during the period.

B) portfolios internal rate of return.

C) return per unit of domestic currency.

D) return on the average investment during the period.

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Answer and Explanation

The time-weighted return measures the return per unit of domestic currency. The calculation involves taking a geometric average of the returns of the various sub-periods.

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接着上一帖的题

Yamisaka has determined that the average monthly return of another Mega client was 1.63 percent during the past year. What is the annualized rate of return?

A) 5.13%.

B) 21.41%.

C) 12.14%.

D) 1.21%.

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Answer and Explanation

Annual return = ( 1 + average subperiod return)^{number of subperiods per year} - 1.

Annual return = (1.0163)¹² - 1 = .21412 or 21.412%.

Annual return = ( 1 + average subperiod return)^{number of subperiods per year} - 1.

Annual return = (1.0163)¹² - 1 = .21412 or 21.412%.

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Concerning the comments of Goode and Yamisaka about performance attribution:

A) Goode is correct; Yamisaka is incorrect.

B) Goode is incorrect; Yamisaka is incorrect.

C) Goode is incorrect; Yamisaka is correct.

D) Goode is correct; Yamisaka is correct.

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Answer and Explanation

The three steps in global performance evaluation are measurement, attribution and appraisal. Measurement is the calculation of return realized over a specified period. Attribution breaks down performance into components of return (asset allocation, sector, security, etc.). Appraisal is the assessment of manager skill using comparative measures such as benchmarks (peer universe or index), risk-adjusted returns or the impact of currency management decisions.

The three steps in global performance evaluation are measurement, attribution and appraisal. Measurement is the calculation of return realized over a specified period. Attribution breaks down performance into components of return (asset allocation, sector, security, etc.). Appraisal is the assessment of manager skill using comparative measures such as benchmarks (peer universe or index), risk-adjusted returns or the impact of currency management decisions.

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The three types of return calculation methods (# 2, 3, 4) missing from Exhibit 1 are:

A) 2. dollar weighted; 3. arithmetic; 4. money weighted.

B) 2. time weighted; 3. geometric; 4. arithmetic.

C) 2. money weighted; 3. time weighted; 4. dollar weighted.

D) 2. money weighted; 3. time weighted; 4. arithmetic.

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Answer and Explanation

Money weighted and dollar weighted are two names for the same return calculation method. Time weighted and geometric returns are also just different terms for the same method of calculation. The correct sequence is therefore money (dollar) weighted, time (geometric) weighted and arithmetic.

Money weighted and dollar weighted are two names for the same return calculation method. Time weighted and geometric returns are also just different terms for the same method of calculation. The correct sequence is therefore money (dollar) weighted, time (geometric) weighted and arithmetic.

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The return calculation method most appropriate for evaluating the performance of a portfolio manager is:

A) money weighted.

B) arithmetic.

C) geometric.

D) holding period.

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Answer and Explanation

Geometric (time weighted) returns provide the best estimate of a portfolio managers return because it neutralizes the impact of the clients cash flow decisions.