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To evaluate manager performance, practitioners will use:
The following attribution analysis summary is from the CFAI Level 3 2022 Curriculum. It shows the combination of using a sample attribution analysis combined with performance appraisal ratios to make a thorough assessment of manager performance, attributing returns to both skill and/or luck.
$$ \small{\begin{array}{c|cc|cc|ccc}
\textbf{Market} & \textbf{Manager A} & & \textbf{Benchmark} & & \textbf{Attribution} & \textbf{Effects} & & \\ \hline
& \textbf{Weight} & \textbf{5-yr} & \textbf{Weight} & \textbf{5-yr} & \textbf{Allocation} & \textbf{Selection +} & \textbf{Total} \\
& & \textbf{return} & & \textbf{return} & & \textbf{Interaction} & \\ \hline
\textbf{Japan} & 51.0\% & 12.4\% & 60.0\% & 11.5\% & -0.21\% & 0.47\% & 0.26\% \\ \hline
\textbf{Australia} & 30.0\% & 5.1\% & 25.4\% & 4.1\% & -0.24\% & 0.31\% & 0.07\% \\ \hline
\textbf{Hong Kong} & 15\% & 8.9\% & 10.0\% & 10.1\% & 0.04\% & -0.18\% & -0.14\% \\ \hline
\textbf{Singapore} & 3.5\% & 5.1\% & 3.0\% & 5.4\% & -0.02\% & -0.01\% & -0.03\% \\ \hline
\textbf{New Zealand} & 0.5\% & 8.75\% & 1.0\% & 9.1\% & 0.00\% & 0.00\% & 0.00\% \\ \hline
\textbf{Total} & \bf{100\%} & \bf{9.42\%} & \bf{100\%} & \bf{9.25\%} & \bf{-0.43\%} & \bf{0.59\%} & \bf{0.17\%}
\end{array}} $$
Key Takeaways:
We need to understand the risk incurred to achieve the above performance. For that risk assessment, we will consider Manager A relative to other managers, using a sample appraisal ratio analysis over the same five-year period.
$$ \begin{array}{c|c|c|c|c}
& \textbf{Manager A} & \textbf{Manager B} & \textbf{Manager C} & \textbf{Benchmark} \\ \hline
\text{Annualized} & 9.42 & 8.23 & 10.21 & 9.25 \\
\text{return} & & & & \\ \hline
\text{Annualized} & 10.83 & 8.10 & 12.34 & 9.76 \\
\text{Std. Dev} & & & & \\ \hline
\text{Sharpe} & 0.68 & 0.76 & 0.66 & 0.73 \\
\text{ratio} & & & & \\ \hline
\text{Treynor} & 0.35 & 0.32 & 0.19 & 0.57 \\
\text{ratio} & & & & \\ \hline
\text{Information} & 0.43 & 0.41 & 0.30 & 0.00 \\
\text{ratio} & & & & \\ \hline
\text{Sortino} & 0.82 & 0.51 & 1.03 & 0.97\\
\text{ratio} & & & & \\
\text{(MAR = 3%)} & & & & \\
\end{array} $$
Key Takeaways:
Question
Which of the following statements is least likely true?
- A manager who over weights a sector that outperforms the benchmark will exhibit a positive allocation effect.
- A manager who over weights a sector that underperforms the benchmark will exhibit a negative allocation effect.
- A manager who over weights a sector that underperforms the benchmark will exhibit a positive allocation effect.
Solution
The correct answer is C.
Answer choice C is incorrect, overweighting a sector that has done poorly relative to the benchmark will result in a negative allocation effect.
Answer choices A and B are both true statements.
Performance Measurement: Learning Module 1: Portfolio Performance Evaluation; Los 1(p) Evaluate the skill of an investment manager