burning0spear

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.

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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.

burning0spear

Which of the following is least likely to be a property of a valid benchmark?

A) The benchmark is consistent with the manager’s style.

B) The weights of the securities in the benchmark should be based on market values.

C) It is possible for the investor to replicate the benchmark.

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The security weights in a benchmark should be clearly identified but there is no stipulation that a valid benchmark have security weights based on market values.

burning0spear

One of the properties of a valid benchmark is that it be reflective of current investment opinion. Which of the following is the most accurate explanation of this property?

A) The manager should have knowledge of the securities in the benchmark.

B) The manager should accept the applicability of the benchmark.

C) The securities in the benchmark should be those favored by a majority of analysts.

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The property that a benchmark should be reflective of current investment opinion refers to the fact that the manager should have knowledge and expertise of the securities in the benchmark. That the manager should accept the applicability of the benchmark refers to the accountable property of a valid benchmark.

burning0spear

Which of the following is NOT regarded to be an essential characteristic of a valid benchmark?

A) Reflective of past investment opinion.

B) Appropriate to the manager’s investment approach and style.

C) Specified in advance.

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The benchmark has seven characteristics. All of the above are included with the exception of ‘reflective of past investment opinion,’ it should be reflective of current investment opinion, and the manager should have current knowledge and expertise of the securities in the benchmark.

burning0spear

Given the following data, how is the manager’s performance most accurately characterized?

Manager's Return

7.6%

Benchmark Return

6.2%

Market Index Return

8.8%

A) The manager earned an excess return from active management but not from style.

B) The manager earned an excess return from style and active management.

C) The manager earned an excess return from style but not from active management.

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The manager earned a return from active management, where the active return is the manager’s return minus the benchmark return (7.60% − 6.20% = 1.40%). The manager did not earn a return from style, where the style return is the benchmark return minus the market return (6.20% − 8.80% = -2.60%).

burning0spear

Given the following data, how is the manager’s performance most accurately characterized?

Manager's Return

5.2%

Benchmark Return

6.3%

Market Index Return

4.3%

A) The manager earned an excess return from style but not from active management.

B) The manager earned an excess return from active management but not from style.

C) The manager earned an excess return from style and active management.

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The manager earned a return from style, where the style return is the benchmark return minus the market return (6.30% − 4.30% = 2.00%). The manager did not earn a return from active management, where the active return is the manager’s return minus the benchmark return (5.20% − 6.30% = -1.10%).

burning0spear

Which of the following is the most appropriate method of calculating the manager’s active return? The manager’s active return is the:

A) market return minus the benchmark return.

B) portfolio return minus the benchmark return.

C) portfolio return minus the market return.

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The manager’s active return is the portfolio return minus the benchmark return, where the benchmark is appropriate to the manager’s style.

optiix

Frank Belanger would like to calculate the rate of return for an illiquid asset. He states that he will use matrix pricing to obtain a substitute for the security’s current price. Which of the following most accurately describes matrix pricing? In matrix pricing, the analyst uses:

A) the price from the last trade for the same security.

B) an average of recent prices.

C) dealer quotes for similar securities.

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Matrix pricing is used when the asset is illiquid and a security price is not readily available. In matrix pricing, the analyst uses dealer quoted prices for similar securities.

optiix

Which of the following would NOT be regarded to be a problem relating to the quality of data used in calculating rates of return?

A) Account valuations include trade date accounting.

B) Matrix pricing is used for some fixed income securities.

C) When accounts contain illiquid assets, estimates or guesses are used in the calculation.

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The use of trade date accounting would be regarded as a positive attribute of the account in the context of measuring returns. Trade date accounting is preferred to settlement date and the inclusion of accrued interest and dividends would be ideal. Matrix pricing is the use of estimated prices taken from quoted prices on securities with similar characteristics; this could clearly introduce inaccuracies in the measurement of returns.

optiix

Accounts that contain illiquid assets present additional problems of accurately measuring return. Which of the following statements would NOT be regarded as a problem associated directly with illiquid assets?

A) Account valuations use trade date accounting as opposed to settlement accounting.

B) Matrix pricing is used.

C) Assets are carried at the price of the last trade.

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The use of trade date accounting is regarded to be a key feature of a good return measurement process. The other options are examples of the problems caused when illiquid assets are included in the account. Matrix pricing is using the quoted price of a similar asset as a proxy for the market value of thinly traded fixed income securities.