Performance Measurement and Attribution Flashcards

In the Brinson-Hood-Beebower (BHB) performance attribution model, the allocation effect captures the value added from:

Answer: Overweighting sectors that outperform the benchmark and underweighting those that underperform

The allocation effect measures the return impact of the manager's decision to over- or underweight sectors relative to the benchmark.

In the Brinson attribution model, the selection effect measures:

Answer: The value added by choosing individual securities that outperform the benchmark within each sector

The selection effect captures the value added (or destroyed) by picking individual securities within a sector that outperform (or underperform) that sector's benchmark return.

In the Brinson model, the interaction effect arises from:

Answer: Simultaneously overweighting a sector AND achieving superior stock selection within that same sector

The interaction effect captures the combined return impact when a manager both overweights a sector and selects outperforming stocks within it — the two decisions reinforce each other.

The primary purpose of the Global Investment Performance Standards (GIPS) is to:

Answer: Provide a standardised framework for calculating and presenting investment performance to enable fair comparison

GIPS establish a common framework for performance reporting to ensure fair representation, full disclosure, and meaningful comparability across investment managers globally.

Under GIPS standards, a 'composite' is defined as:

Answer: An aggregation of all actual, discretionary, fee-paying portfolios managed under the same investment mandate or strategy

A GIPS composite must include all actual, discretionary, fee-paying portfolios managed to the same investment strategy, preventing firms from cherry-picking favourable results.

A firm claiming GIPS compliance must present a minimum of how many years of compliant performance history (or since inception if the firm is younger)?

Answer: 5 years

GIPS requires a minimum of 5 years of compliant performance history at initial claim, with firms then required to build up to 10 years by adding one year of history annually.

Which of the following practices is consistent with GIPS standards?

Answer: Using the time-weighted return as the standard method of calculating composite returns unless the mandate requires money-weighted return

GIPS prescribes the time-weighted return as the standard calculation method, though money-weighted return is permitted for certain mandate types such as private equity.