CPS Performance Measurement and Evaluation 3

Question 1

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

Accepted Answer

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

Answer

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.

Question 2

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

Accepted Answer

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

Answer

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.

Question 3

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?

Accepted Answer

12.7%

Answer

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

Question 4

Under GIPS, a composite is defined as:

Accepted Answer

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

Answer

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.

Question 5

The interaction effect in the Brinson performance attribution model represents:

Accepted Answer

The combined joint impact of both allocation and selection decisions together

Answer

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

CPS - Certified Portfolio Specialist Practice Test

CPS - Certified Portfolio Specialist Practice Test

CPS Performance Measurement and Evaluation 3