GIPS performance reporting requirements - Quiz currency, together, security, reporting, allocation

adehbone

I got this wrong, so wanted to post ...

A consultant is analyzing the performance of a composite over the past two years. To do so, he determines the excess return for each period and then compounds these over the two years to obtain the total two year excess return. For the attribution analysis, he computes the security selection effect, the market allocation effect, and the currency effect each year. He then adds all the yearly security selection effects together to get the total security selection effect. He does the same for the market allocation effect and the currency allocation effect.

A. The calculations for both the excess return and the attribution analysis are correct.
B. The calculations for both the excess return and the attribution analysis are incorrect.
C. The calculations for the excess return are correct but the calculations for the attribution analysis are incorrect.

Chuckrox

B

For total active return you get the compounded portfolio return over the whole period and subtract the compounded benchmark return over the whole period

For the individual factors you take the second period effect and multiply by the first period portfolio return, then take the first period effect and multiply by the second period benchmark return, then add them...

liangfeng

C. don't believe you can present these returns as described

mp3bu

I don't see a correct answer, because you cannot simply compound each year's excess return. The excess return in year 1 must be compounded against the benchmark return in year 2 and added the to excess return in year 2 compounded against the portfolio return in year 1. This would give you the 2 year true excess return. It does not seem like the consultant did this. Also, for a given year, you can sum the currency effect, security selection effect, and market allocation effect in order to get the excess return in that given year. So, I don't see anything wrong with how the consultant calculated the attribution. Maybe I am missing something, but I would have said:

D. Excess return calculation was INCORRECT and Attribution calculations were CORRECT.

Analyze_This

B. I agree with boston's explanation.

liangfeng

C i think.

Attribution factors cannot be summed, they have to apply the formula.

S1(1+Benchmark return Yr2) +S2(1+Portfolio return Yr1)

bodhisattva

B. I agree with Boston explanation

cityboy

^
But attribution for a given year can be summed, no?

IAmNeil

i've changed my mind, i go with B. didn't read the question properly.

There's a RTFQ learner right there.

mcmc

mib - I selected B because though you can add the individual components, the question doesn't mention the Income yield factor, which is part of that big summation formula. I therefore took it to mean that the question was intentionally trying to trick us by saying you only have to add those 3 components, which I reasoned was wrong.