Performance Evaluation Answers Part A

PERFORMANCE EVALUATION
Answers
Question 1
Part A
 Pure sector allocation compares the sector weights of the portfolio to those of the benchmark.
It captures value added only from sector weighting.
 Within-sector selection compares the manager’s security selection return to those of the
benchmark. It captures only security selection value added.
 Allocation/selection interaction combines over- and underweighting with security selection
by sector. It is a joint or combined effect necessary to reconcile to total value added.
Sample Scoring Key:

1 point each for the 3 components and 1 point for explaining each.
Part B
Passive
 The high style fit (R2) of 96% indicates only 4% is not explained by the index’s returns.
 97–99% is consistently due to small cap growth index returns, making passive replication
easy.
Sample Scoring Key:

1 point for each of the three required items.
Part C
They are not. See part B. They are implementing SC growth, but the data indicates a passive, not
active, approach as assigned.
Sample Scoring Key:

1 point for “no” and 2 for the discussion of why.
Question 2
Part A
(.31 − .35) × (−3.00% − 0.75%) = 0.150%
1
Sample Scoring Key:
2 points for using the correct weights and percentage returns.
1 point for the correct answer.
Part B
.23 × (5.30% − 6.00%) = −0.161%
Sample Scoring Key:

Part C
(.24 − .28) × (2.9% − 1.0%) = −0.076%
Sample Scoring Key:

Question 3
Part A
The time-weighted returns of the accounts are virtually the same, indicating the underlying
manager returns and account management were the same.
E47’s TWR and MWR are equal, suggesting the account had no ECFs.
The difference in E36’s TWR and MWR is consistent with volatility of return within the month
and could be explained by either: (1) account contributions came in following higher and before
lower within the month return, or (2) account withdrawals occurred following lower and before
higher within the month return.
Sample Scoring Key:
One point each for: determining the accounts were most likely managed the same way, using the
comparable time-weighted returns to support the determination, E47 likely had no ECFs, E36 did
have ECFs due to the difference between the TWR and MWR, and any correct discussion of how
ECFs could lead E36’s MWR to be below its TWR.
Candidate discussion: This question tests an understanding of TWR versus MWR. But instead
of just calculating, you must infer what likely led to the output. The 5 minutes and direction that
“simply stating ECFs can cause differences in TWR and MWR receives no credit” is sufficient
2
direction to go into detail. Each point made in the sample answer comes from the taught material
and case facts, and is relevant to the question asked. You can vary the phrasing, but assume that
for each element you did not cover, your score goes down one point. You had what you needed
to answer the question.
Part B
Use Baker:
 Meets the mandate of at least a 1.10 beta.

 Has minimal systematic bias. The 0.98 regression beta shows benchmark and portfolio
returns track closely.
 Has low tracking error at 5.7%, again indicating benchmark and portfolio returns track
closely.
 Has a high coverage ratio (100% – 4%), indicating it represents the securities used in the
portfolio.
Archie is not appropriate. 0.99 beta does not meet the mandate of 110% or greater exposure to
market systematic risk. (The beta needs to be 1.10 or greater.)
Charlie results in high systematic bias with a 1.10 regression beta of portfolio returns to the
benchmark.
Sample Scoring Key:
One point for selecting Baker. One point each for two reasons supporting Baker, and one point
each for a reason to reject Alpha and Charlie.
Candidate discussion: The question applies tests of benchmark quality and account objectives.
The 10% (or more) higher beta mandate versus the S&P implies a beta of 1.10 or more. There is
no data to deal with the market cap mandate. The beta from regressing portfolio to benchmark
returns determines style fit. Approaching 1.0 indicates minimal systematic bias. A lower tracking
error (volatility of alpha) and higher coverage (low noncoverage) also indicate a good
benchmark fit to the portfolio. Other reasons to reject Charlie are the low coverage ratio (high
noncoverage) and large tracking error. Be careful to make your reasons different when two or
more are requested. For example, selecting Baker based on its appropriate beta of at least 1.10
gets credit, but then you cannot reject Archie because it’s beta is 0.99. Expect that to be treated
as a separate reason.
All the benchmark turnovers are low, and high turnover would only be an issue for a passive
(match the benchmark) objective. Benchmark standard deviation by itself is not a relevant factor.

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PERFORMANCE EVALUATION

Sample Scoring Key:

Sample Scoring Key:

Sample Scoring Key:

(.31 − .35) × (−3.00% − 0.75%) = 0.150%

.23 × (5.30% − 6.00%) = −0.161%

Sample Scoring Key:

(.24 − .28) × (2.9% − 1.0%) = −0.076%

Sample Scoring Key:

Sample Scoring Key:

 Meets the mandate of at least a 1.10 beta.

Sample Scoring Key:

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