LOS f, (Part 2): Evaluate the advantages and disadvantages of alternative types of performance benchmarks.

Q1. Custom security-based benchmarks reflect the manager’s investment universe, weighted to reflect a particular approach. Which of the following is NOT an advantage of this type of benchmark?

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

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

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

Q2. All of the following would be regarded as a specific disadvantage of factor-based-models, EXCEPT:

A)   the manager’s style may deviate from the style reflected in the benchmark.

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

C)   the benchmark may not be investable.

Q3. Which of the following statements about style indexes is FALSE?

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

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

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

LOS f, (Part 2): Evaluate the advantages and disadvantages of alternative types of performance benchmarks. fficeffice" />

Q1. Custom security-based benchmarks reflect the manager’s investment universe, weighted to reflect a particular approach. Which of the following is NOT an advantage of this type of benchmark?

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

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

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

Correct answer is C)

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

Q2. All of the following would be regarded as a specific disadvantage of factor-based-models, EXCEPT:

A)   the manager’s style may deviate from the style reflected in the benchmark.

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

C)   the benchmark may not be investable.

Correct answer is A)

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

Q3. Which of the following statements about style indexes is FALSE?

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

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

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

Correct answer is C)

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