CIC Performance Measurement and Reporting 3

Question 1

The Sortino Ratio improves upon the Sharpe Ratio primarily by:

Accepted Answer

Replacing total standard deviation with downside deviation in the denominator

Answer

The Sortino Ratio uses downside deviation (volatility of returns below a minimum acceptable return) instead of total standard deviation, reflecting that upside volatility is not a true risk for most investors.

Question 2

The M-squared (M²) measure adjusts portfolio performance to:

Accepted Answer

Leverage or de-leverage the portfolio to match the benchmark's total risk level, then compare returns

Answer

M² scales the portfolio to have the same total risk (standard deviation) as the benchmark and computes the hypothetical return, enabling direct return comparison on a risk-adjusted basis.

Question 3

Which of the following best defines 'active return'?

Accepted Answer

Portfolio return minus the benchmark return over the same period

Answer

Active return (also called excess return or alpha in the attribution context) is simply the portfolio's return minus the benchmark's return, representing the value added or subtracted by active management.

Question 4

When presenting composite performance under GIPS, the dispersion measure reported alongside composite returns is intended to show:

Accepted Answer

The variability of individual portfolio returns within the composite for that period

Answer

GIPS requires a measure of internal dispersion (e.g., equal-weighted standard deviation) to show how consistently individual portfolios within the composite performed relative to the composite average.

Question 5

A portfolio manager outperformed the benchmark by overweighting the technology sector, which subsequently rallied. In BHB attribution, this contribution is captured in the:

Accepted Answer

Allocation effect

Answer

The allocation effect captures the impact of deviating from benchmark sector weights; overweighting a sector that outperforms the overall benchmark produces a positive allocation effect.

(CIC) Certified Investment Counselor Practice Test

(CIC) Certified Investment Counselor Practice Test

CIC Performance Measurement and Reporting 3