burning0spear

Which of the following is NOT required for macro performance attribution?

A) Tactical asset allocations.

B) Benchmark portfolio returns.

C) Fund returns, valuations, and external cash flows.

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There are three main inputs into the macro attribution approach:

1) policy allocations
2) benchmark portfolio returns and
3) fund returns, valuations and external cash flows.

burning0spear

Which of the following is least likely to be utilized in macro performance evaluation?

A) Pure sector allocation effects.

B) Beginning of period fund valuations.

C) External cash flows into the fund.

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Pure sector allocation effects result from micro performance evaluation. The inputs to macro performance evaluation include policy allocations, benchmark portfolio returns, fund returns, fund valuations, and external cash flows.

burning0spear

Which of the following would be least appropriate in macro performance evaluation?

A) A benchmark return is calculated as a weighted average of the individual managers' benchmark returns.

B) Market indices would be used for manager styles.

C) External cash flows would be used to determine the impact of the sponsor’s decision making.

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Broad market indices would be used for asset categories. Narrow indices would be used for manager’s investment styles.

burning0spear

Frank Busby is on the board for a pension fund and would like to evaluate the fund’s performance and determine its sources of return. Which of the following is Busby most likely to utilize?

A) Micro performance evaluation.

B) Performance decomposition analysis.

C) Macro performance evaluation.

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Macro performance evaluation is performed at the fund sponsor level. It decomposes fund performance into that from net contributions, the risk-free asset, asset categories, benchmarks, investment managers, and allocation effects.

burning0spear

Which of the following is the least likely to be an input into micro performance evaluation?

A) The sector return for the manager.

B) The return on the risk-free asset.

C) The weight of a sector in the benchmark.

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The return on the risk-free asset is not an input into micro performance evaluation but it would be used as an input into macro performance evaluation.

burning0spear

There are two basic forms of performance attribution, micro and macro attribution. Which of the following statements about the two approaches is most accurate?

Macro Performance

Micro Performance

A) At fund sponsor level, rate-of-return and value metric At investment manager level, rate-of-return and value metric

B) At investment manager level, rate-of-return metric only At fund sponsor level, rate-of-return metric

C) At fund sponsor level, rate-of-return metric only At investment manager level, rate-of-return metric only

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Macro performance is carried out at the fund sponsor level, micro performance at the investment manager level. Both rate-of-return (percentage terms) and value metrics (monetary terms) are used.

burning0spear

Which of the following would be regarded as the least appropriate method to measure the performance of a hedge fund?

A) The Sharpe ratio.

B) Separate long/short benchmarks.

C) Relative performance comparisons with traditional benchmarks.

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Construct a separate long and short benchmark, which can then be combined together in their relevant proportions. The Sharpe ratio compares the return to risk free rather than a benchmark. Relative performance using traditional benchmarks is the least appropriate given hedge funds concentration on absolute returns and the lack of reliable traditional benchmarks.

burning0spear

The Sharpe ratio has become a commonly used performance measure for hedge funds. Which of the following statements in relationship to the use of the Sharpe ratio in the assessment of hedge fund performance is least accurate?

A) The Sharpe ratio is the excess returns to the volatility encountered in earning them.

B) A hedge fund’s Sharpe ratio can be compared to that of a universe of similar hedge funds.

C) The use of derivatives positions in a hedge fund removes most of the skewness in returns making the use of standard deviations appropriate.

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It is clear that for a significant number of hedge funds returns demonstrate a significant degree of skewness often created by the use of derivative positions. The other statements are correct.

burning0spear

With regard to the use of value added return in the measurement of hedge fund performance, which of the following statements is most accurate?

A) Although weights sum to zero a return is calculated by summing the performance impacts of the individual long positions.

B) Value added return is simply the difference between the portfolio return and the benchmark return.

C) Value added return is calculated as the difference between the portfolio return, given benchmark weightings, and the actual portfolio return.

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To replicate a zero net asset hedge fund the weights must add to zero. Calculation of return is achieved by summing the individual long and short positions and the value added return is the difference between the portfolio return and the benchmark return.

burning0spear

There should be minimal systematic bias in the benchmark relative to the account. Which of the following statements about systematic bias is least accurate?

A) A beta significantly below one would be ideal as this would indicate that the manager’s account is significantly less risky than the benchmark.

B) A manager's active decisions should be uncorrelated with the manager’s investment style.

C) The manager can calculate the historical beta of the account to the benchmark.

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Ideally, the manager would be looking for a beta close to one. This would indicate that the portfolio and benchmark are sensitive to the same systematic factors, which would be a desirable characteristic. If the beta differs significantly from one, the benchmark may be responding to a different set of factors, which is not a desirable characteristic of a benchmark.