Bill Carter, CFA and Bob Walters, CFA are analyzing the recent return of several funds they have been assigned to manage. The funds are Fund A, Fund B, Fund C, and Fund D as indicated in the table below.
| | Fund A | Fund B | Fund C | Fund D | Market | Return | | 7.80% | 7.20% | 8.20% | 7.60% | 7.00% | Beta | | 1.10 | 0.90 | 1.20 | 1.05 | 1.00 | Return Std.Dev. | | 4.00% | 3.44% | 4.15% | 3.50% | 3.55% | Tracking Error* | | 0.82% | 0.45% | 1.02% | 0.67% |
| *Tracking error is the standard deviation of the difference between the Fund Return and the Market Index Return
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The risk-free rate of return for the relevant period was 3.5%. The management of the firm that Carter and Walters works for is very proud of the fact that all of the four funds had a higher return than the overall market as indicated on the table. The firms management wants to advertise how, using the market as a benchmark, these funds have had returns higher than that benchmark. The firms management asks Carter and Walters to compute several performance measures such as the Treynor measure, the Sharpe ratio, and the M2 measure. The firms management also asks for the construction of quality control charts. In going over the results, Carter is skeptical of the results and using the market as a benchmark because that benchmark was not specified in advance. Walters says that he is skeptical too because it is not clear if the market is an appropriate benchmark in all cases. They want to proceed cautiously because the firms management recently instituted policies for manager continuation. For each manager, the firms management has set up the null hypothesis that a manager has no skill and the alternative hypothesis is that the manager has skill in adding value. Carter and Walters discuss constructing a custom benchmark for some of these or other funds they might manage. A few of these funds hold cash positions to take advantage of good investment opportunities when they arise. Carter says that the benchmark they construct should include cash in the weighting scheme. They set aside a few weeks to construct a preliminary benchmark for several funds. Walters wants to be thorough, because once they construct the benchmark, he doesnt plan to make any modifications to the custom benchmark.
If the returns of each fund were plotted over a quality control chart using the market as a benchmark, the final point of the value-added line would be above zero, i.e., above the horizontal axis for: | A) | all of the funds except C only. |
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Answer and Explanation
Since all of the funds returns are higher than the benchmark for the period, all of the funds would have a positive end point for the cumulative value-added line.
With respect to the reasons for Carter and Walters being skeptical of using the market as a benchmark: A) | both Carter and Walters are correct. |
| | B) | both Carter and Walters are wrong. |
| | C) | Carter is correct and Walters is wrong. |
| | D) | Carter is wrong and Walters is correct. |
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Answer and Explanation
Their objections are both justified. A benchmark should be specified in advance and deemed appropriate for the style of the fund.
With respect to the considerations that Carter and Walters put into preparing a custom benchmark, including a weighting for cash and not making modifications: | A) | Carter and Walters are both correct. |
| B) | Carter is correct and Walters is wrong. |
| | C) | Carter and Walters are both wrong. |
| | D) | Carter is wrong and Walters is correct. |
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Answer and Explanation
Carter is correct in that a custom benchmark should include an appropriate weight for cash holdings. Walters is wrong in that a benchmark should be modified on a preset schedule.
The firm that Carter and Walters work for have set up a null hypothesis for each manager. In such a case, the firm would make a type II error if it: | A) | keeps an unskilled manager. |
| | B) | hires a second manager to help a doubtful manager. |
| | C) | uses a course filter rather than a fine filter in the evaluation process. |
| D) | fires a skilled manager. |
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Answer and Explanation
In this case, we assume a manager does not add value and try to gather information that the manager does. Without sufficient evidence to prove value is added, the manager would be fired. Random noise could lead to this conclusion even though the manager does add value.
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发表于 2008-9-17 18:18
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500 portfolio was 18 percent. 
