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There are two basic forms of performance attribution, micro and macro attribution. Which of the following statements about the two approaches is most accurate?
Macro PerformanceMicro Performance
A)
At fund sponsor level,
rate-of-return and value metric
At investment manager level,
rate-of-return and value metric
B)
At investment manager level,
rate-of-return metric only
At fund sponsor level,
rate-of-return metric
C)
At fund sponsor level,
rate-of-return metric only
At investment manager level,
rate-of-return metric only



Macro performance is carried out at the fund sponsor level, micro performance at the investment manager level. Both rate-of-return (percentage terms) and value metrics (monetary terms) are used.

TOP

Which of the following is the least likely to be an input into micro performance evaluation?
A)
The sector return for the manager.
B)
The return on the risk-free asset.
C)
The weight of a sector in the benchmark.



The return on the risk-free asset is not an input into micro performance evaluation but it would be used as an input into macro performance evaluation.

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Frank Busby is on the board for a pension fund and would like to evaluate the fund’s performance and determine its sources of return. Which of the following is Busby most likely to utilize?
A)
Micro performance evaluation.
B)
Performance decomposition analysis.
C)
Macro performance evaluation.



Macro performance evaluation is performed at the fund sponsor level. It decomposes fund performance into that from net contributions, the risk-free asset, asset categories, benchmarks, investment managers, and allocation effects.

TOP

Which of the following would be least appropriate in macro performance evaluation?
A)
A benchmark return is calculated as a weighted average of the individual managers' benchmark returns.
B)
Market indices would be used for manager styles.
C)
External cash flows would be used to determine the impact of the sponsor’s decision making.



Broad market indices would be used for asset categories. Narrow indices would be used for manager’s investment styles.

TOP

Which of the following is least likely to be utilized in macro performance evaluation?
A)
Pure sector allocation effects.
B)
Beginning of period fund valuations.
C)
External cash flows into the fund.



Pure sector allocation effects result from micro performance evaluation. The inputs to macro performance evaluation include policy allocations, benchmark portfolio returns, fund returns, fund valuations, and external cash flows.

TOP

Which of the following is NOT required for macro performance attribution?
A)
Tactical asset allocations.
B)
Benchmark portfolio returns.
C)
Fund returns, valuations, and external cash flows.


There are three main inputs into the macro attribution approach:

1) policy allocations
2) benchmark portfolio returns and
3) fund returns, valuations and external cash flows.

TOP

In comparing macro and micro performance attribution methodologies to evaluate the drivers of investment performance, it is most correct to say that:
A)
micro evaluation is an incremental approach and macro evaluation focuses on deviations from benchmarks.
B)
both macro and micro evaluation focus on the deviations from benchmarks.
C)
macro evaluation is an incremental approach and micro evaluation focuses on deviations from benchmarks.



This is the most correct statement. The macro evaluation looks at the beginning and ending values of the entire fund and attributes the return contributed at each level of decision making. Micro evaluation looks at individual portfolios and tries to explain its return with respect to its deviation from a benchmark.

TOP

Kelli Blakely, a portfolio manager with the Miranda Fund, a large cap index fund, achieved a 10.2% return during the past year while the S&P 500 lost 22.5% for the same period.
Her portfolio consisted of stocks and cash.
Blakely was able to produce such returns through her exceptional market timing and securities selection skills.
During the year, the S&P exhibited a standard deviation of 44% while Blakely’s portfolio standard deviation was 37%.
The calculated beta on the Miranda Fund was 1.10.
The market proxy and benchmark for performance measurement purposes is the S&P 500.

Using the S&P 500 as a benchmark for the year, the allocation between stock and cash was a constant 97% and 3%, respectively.
During the year, Blakely was concerned that the combination of a weak economy and geopolitical uncertainties would negatively impact the market returns.
Taking a bold step, she changed her market allocation to an average of 50% in stocks and 50% in cash.
Throughout the year, the risk-free rate of cash returns was 2%.

What is the total value added?
A)
21.26%.
B)
32.70%.
C)
34.70%.



total value-added = overall actual fund return – overall benchmark returns
= 10.2 − (-22.5) = 32.70%

Blakely’s Miranda Fund was able to outperform the S&P 500 index by 32.7%.

TOP

Value added return is defined as the:
A)
fund return minus the risk-free rate of return.
B)
portfolio return minus the benchmark return.
C)
portfolio return in excess of the return predicted based on the Capital Asset Pricing Model.



Value added return = Portfolio return – Benchmark return

TOP

Which of the following statements regarding attribution analysis, benchmarks, and evaluating portfolio managers is CORRECT?
A)
Attribution analysis for bonds is virtually impossible.
B)
Benchmark error is nonexistent with the Treynor measure.
C)
Attribution analysis separates a portfolio manager's performance into an allocation effect and a selection effect.



Attribution analysis can be done with bonds as it is with equities. The only difference is the categories of attribution. Benchmark error is very much a part of the Treynor measure, as it uses beta as its risk measure.

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