Reading 43: Evaluating Portfol....rmance－LOS f,(Part 2) advantages

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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 2): Evaluate the advantages and disadvantages of alternative types of performance benchmarks.

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

A) the managers style may deviate from the style reflected in the benchmark.

B) the benchmark may not be investable.

C) factor model benchmarks are not always intuitive to the fund sponsor or indeed investment manager.

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

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Answer and Explanation

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

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

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

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

C) Allows continual monitoring of the investment process.

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

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Answer and Explanation

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

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Which of the following statements about style indexes is FALSE?

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

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

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

D) Style indexes include large-capitalization growth and small capitalization value.

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Answer and Explanation

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