R02 Performance attribution and benchmarks: free practice questions
5 free questions on Performance attribution and benchmarks, part of learning outcome 9 (Investment performance). Pick an answer to check it, or open the answer to see why each option is right or wrong.
Question 1 of 5
Through which of the following can portfolio managers achieve good or bad results?
1. Asset allocation
2. Stock selection
3. Market timing
4. The level of risk taken against the benchmark
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The answer is A: 1, 2, 3 and 4
Results come from asset allocation, stock selection, market timing and the risk taken relative to the benchmark. Performance attribution separates these contributions.
Why the other options are wrong
B
Market timing and risk-taking also affect results.
C
Asset allocation is a major source of performance.
D
Taking more or less risk than the benchmark also matters.
Question 2 of 5
A benchmark holds 50% UK equities (index return 12%), 30% overseas equities (18%), 15% fixed interest (4%) and 5% cash (3%). What is the benchmark return?
That adds the index returns without weighting them.
C
That uses different weightings from the benchmark's.
D
That's the simple average of the four index returns.
Question 3 of 5
Benchmark weights are 50% UK and 30% overseas equities. The manager's UK equities returned 14% against an index return of 12%, and her overseas equities 16% against 18%. Other classes matched their indices. What did stock selection contribute?
That adds the overseas underperformance instead of deducting it.
B
That counts only the UK outperformance.
D
The UK gain and overseas loss don't cancel exactly.
Question 4 of 5
A UK equity portfolio was heavily overweight in banks and property shares during the 2008/09 crisis. What is this an example of?
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The answer is B: Sector choice reducing returns
Within an asset class, out- or underperformance comes from sector choice (sector weightings) or stock selection (weightings in individual shares). Banks and property underperformed in 2008/09.
Why the other options are wrong
A
This is about sector weightings.
C
This is within UK equities.
D
Being overweight in these sectors would probably have hurt.
Question 5 of 5
Which of the following are steps in performance attribution?
1. Determine the benchmark's asset allocation
2. Calculate the benchmark return at index performance
3. Compare the manager's allocation using index returns
4. Calculate the fund's Sharpe ratio
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The answer is C: 1, 2 and 3 only
Attribution identifies a benchmark, determines its allocation, calculates its return at index performance, compares the manager's allocation, then measures the effect of stock or sector selection.
Why the other options are wrong
A
The Sharpe ratio is a separate risk-adjusted measure.
B
Comparing the manager's allocation is also a step.
D
Determining the benchmark's allocation is a step; the Sharpe ratio isn't.
Practise all 12 Performance attribution and benchmarks questions
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