burning0spear

Given the following data, how is the manager’s performance most accurately characterized?

Manager's Return

5.2%

Benchmark Return

6.3%

Market Index Return

4.3%

A) The manager earned an excess return from style but not from active management.

B) The manager earned an excess return from active management but not from style.

C) The manager earned an excess return from style and active management.

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The manager earned a return from style, where the style return is the benchmark return minus the market return (6.30% − 4.30% = 2.00%). The manager did not earn a return from active management, where the active return is the manager’s return minus the benchmark return (5.20% − 6.30% = -1.10%).

burning0spear

Given the following data, how is the manager’s performance most accurately characterized?

Manager's Return

7.6%

Benchmark Return

6.2%

Market Index Return

8.8%

A) The manager earned an excess return from active management but not from style.

B) The manager earned an excess return from style and active management.

C) The manager earned an excess return from style but not from active management.

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The manager earned a return from active management, where the active return is the manager’s return minus the benchmark return (7.60% − 6.20% = 1.40%). The manager did not earn a return from style, where the style return is the benchmark return minus the market return (6.20% − 8.80% = -2.60%).

burning0spear

Which of the following is NOT regarded to be an essential characteristic of a valid benchmark?

A) Reflective of past investment opinion.

B) Appropriate to the manager’s investment approach and style.

C) Specified in advance.

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The benchmark has seven characteristics. All of the above are included with the exception of ‘reflective of past investment opinion,’ it should be reflective of current investment opinion, and the manager should have current knowledge and expertise of the securities in the benchmark.

burning0spear

One of the properties of a valid benchmark is that it be reflective of current investment opinion. Which of the following is the most accurate explanation of this property?

A) The manager should have knowledge of the securities in the benchmark.

B) The manager should accept the applicability of the benchmark.

C) The securities in the benchmark should be those favored by a majority of analysts.

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The property that a benchmark should be reflective of current investment opinion refers to the fact that the manager should have knowledge and expertise of the securities in the benchmark. That the manager should accept the applicability of the benchmark refers to the accountable property of a valid benchmark.

burning0spear

Which of the following is least likely to be a property of a valid benchmark?

A) The benchmark is consistent with the manager’s style.

B) The weights of the securities in the benchmark should be based on market values.

C) It is possible for the investor to replicate the benchmark.

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The security weights in a benchmark should be clearly identified but there is no stipulation that a valid benchmark have security weights based on market values.

burning0spear

Custom security-based benchmarks reflect the manager’s investment universe, weighted to reflect a particular approach. Which of the following is NOT an advantage of this type of benchmark?

A) Allows fund sponsors to effectively allocate risk across investment management teams.

B) It meets all the required benchmark properties and all of the benchmark validity criteria.

C) It is cheap to construct and easy to maintain.

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A major disadvantage of custom security-based benchmarks is that they can be expensive to construct and maintain. The other statements are regarded to be advantages of using custom security-based benchmarks.

burning0spear

All of the following would be regarded as a specific disadvantage of factor-based-models, EXCEPT:

A) it is possible to construct multiple benchmarks, all having the same factor exposures but with different returns.

B) the benchmark may not be investable.

C) the manager’s style may deviate from the style reflected in the benchmark.

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The manager’s style may deviate from the style reflected in the benchmark is a weakness of broad based market indexes not factor-model-based benchmarks. The other statements are regarded to be disadvantages of factor-model-based benchmarks.

burning0spear

Which of the following statements about style indexes is least accurate?

A) Some style indexes can contain weightings in certain securities and/or sectors that may be larger than considered prudent.

B) They are widely available, widely understood and widely accepted.

C) They help fund sponsors better understand a manager’s investment style, by capturing factor exposures.

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Helping fund sponsors better understand a manager’s investment style, by capturing factor exposures is an advantage of factor models and not style indexes. The other statements are true in the context of style indexes.

burning0spear

Which of the following statements best describes the steps required to construct a custom security-based benchmark?

A) Identify the manager’s investment process including asset selection and weighting; use representative assets and long run average weightings for the benchmark; assess and rebalance the benchmark on a predetermined schedule.

B) Identify the manager’s investment process including asset selection and weighting; use the same assets and weighting for the benchmark; assess and rebalance the benchmark on a predetermined schedule.

C) Identify the manager’s investment process including asset selection and weighting; use the same assets as the manager and the long run average weighting for the benchmark; assess and rebalance the benchmark on a predetermined schedule.

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The three steps required to construct a custom security-based benchmark are as follows:

1. Identify the manager’s investment process including asset selection and weighting.
2. Use the same assets and weighting for the benchmark.
3. Assess and rebalance the benchmark on a predetermined schedule.

burning0spear

Which of the following is least likely to be a step in the construction of a custom security-based benchmark?

A) Use the same weights for the benchmark as the manager.

B) Calculate the historical mean and standard deviation for the benchmark.

C) Identify the manager’s investment process.

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Although calculating the historical mean and standard deviation for the benchmark is something that many portfolio managers will do, it is not specified as one of the steps in the construction of a custom security-based benchmark.