Reading 43: Evaluating Portfol....rmance－LOS f,(Part 1)

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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 f, (Part 1): Discuss the properties of a valid benchmark.

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

A) Appropriate to the managers investment approach and style.

B) Specified in advance.

C) Reflective of past investment opinion.

D) Measurable.

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Answer and Explanation

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.

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

B) The securities in the benchmark should be those favored by a majority of institutional investors.

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

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

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 Answer and Explanation

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.

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

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

B) The benchmark is consistent with the managers style.

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

D) The benchmark is known to the manager and fund sponsor in advance, at the start of the evaluation period.

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Answer and Explanation

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.