Performance Measurement and Evaluation Flashcards

In the Brinson attribution model, the 'selection effect' represents:

Answer: The value added from selecting individual securities within each sector versus holding the sector index

The selection effect in the Brinson model captures the value added (or subtracted) by choosing specific securities within a sector compared to simply holding that sector's benchmark weight.

The Global Investment Performance Standards (GIPS) were developed primarily to:

Answer: Create ethical standards for fair representation and full disclosure of investment performance

GIPS were created to prevent misleading performance presentation practices and ensure that investment managers fairly represent and fully disclose their performance records to prospective clients.

A portfolio has a beta of 1.1 and an alpha of 2%. If the market returns 10% and the risk-free rate is 3%, what is the portfolio's actual return?

Answer: 12.7%

CAPM expected return = 3% + 1.1 × (10% − 3%) = 10.7%; adding alpha of 2% gives actual return = 12.7%.

Under GIPS, a composite is defined as:

Answer: An aggregation of portfolios managed according to the same investment mandate, objective, or strategy

GIPS defines a composite as a grouping of all portfolios sharing the same investment mandate or strategy, preventing cherry-picking of only favorable accounts for performance presentation.

The interaction effect in the Brinson performance attribution model represents:

Answer: The combined joint impact of both allocation and selection decisions together

The interaction effect captures the incremental contribution from simultaneously making good allocation AND selection decisions in the same sector, beyond their separate individual contributions.

A key limitation of using the Sharpe Ratio for performance evaluation is that:

Answer: It assumes normally distributed returns, potentially underweighting tail risks in non-normal distributions

The Sharpe Ratio's reliance on standard deviation assumes normally distributed returns, which can significantly understate risk for strategies with fat tails, negative skewness, or significant kurtosis.

Performance persistence in portfolio management refers to:

Answer: The tendency for past outperformance to predict continued future outperformance

Performance persistence studies examine whether managers who outperform in one period continue to outperform in subsequent periods, which has important implications for whether past performance is a valid criterion for manager selection.