IMC Performance Measurement and Attribution 3

Question 1

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

Accepted Answer

Overweighting sectors that outperform the benchmark and underweighting those that underperform

Answer

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

Question 2

In the Brinson attribution model, the selection effect measures:

Accepted Answer

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

Answer

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.

Question 3

In the Brinson model, the interaction effect arises from:

Accepted Answer

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

Answer

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.

Question 4

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

Accepted Answer

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

Answer

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

Question 5

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

Accepted Answer

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

Answer

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

IMC Practice Test

IMC Practice Test

IMC Performance Measurement and Attribution 3