optiix

Which of the following is the most likely impact of receiving a contribution into an account at the beginning of the period as opposed to the end of the month?

A) Return will be unaffected at the impact of the contribution has an equal impact on the numerator and denominator.

B) Return will be lower because the impact on the numerator outweighs the impact of the contribution on the denominator.

C) Return will be lower because the contribution is added to the assets in the denominator and reduces the size of the numerator.

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If you consider the calculation of return when a contribution is received at the beginning of the period, it is added to the opening market value. This increases the denominator, which is now opening market value plus the contribution. In the numerator, the addition of the contribution to the opening market value reduces the difference between this value and the closing value at the end of the month. There is a larger denominator and a smaller numerator. Therefore, return must be reduced.

optiix

What is the goal of performance appraisal?

A) Interpretation of performance attribution.

B) Identification of the sources of differences between portfolio and benchmark risk and return.

C) Identification of overall risk and return.

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Performance appraisal involves the interpretation of performance attribution. A judgment is made about manager’s decisions and skill, in an effort to differentiate between returns attributable to luck and those attributable to skill.

optiix

In global performance evaluation, performance attribution seeks to:

A) differentiate whether returns come from a manager’s luck or skill.

B) identify the sources of difference between portfolio and benchmark return.

C) measure the risk and return of the portfolio.

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Performance attribution seeks to identify the sources of difference between portfolio and benchmark return. Note that performance measurement involves the calculation of risk and return, while performance appraisal seeks to identify whether returns are a result of a manager’s luck or skill.

optiix

In the management of a fund, performance evaluation is part of:

A) the feedback step of the investment management process.

B) the strategic decision-making step of the investment management process.

C) the compensation computation of the investment management process.

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Performance valuation is part of the feedback step.

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With respect to the level of return and how the return was earned, performance evaluation should:

A) give an indication of both the level of return and how the return was earned.

B) not give an indication of either the level of return or how the return was earned.

C) give an indication of the level of return but not how the return was earned.

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Performance evaluation is more than a simple exercise in calculating rates of return. Rather, it provides an exhaustive “quality control” check, emphasizing not only the performance of the fund and its constituent parts relative to objectives, but the sources of that relative performance as well.