{"id":33851,"date":"2023-11-11T01:25:19","date_gmt":"2023-11-11T01:25:19","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=33851"},"modified":"2024-03-23T02:03:36","modified_gmt":"2024-03-23T02:03:36","slug":"evaluation-of-investment-manager-skill","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/evaluation-of-investment-manager-skill\/","title":{"rendered":"Evaluation of Investment Manager Skill"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/wn9XqSbqSR0\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<h2>Sample Evaluation<\/h2>\n<p>To evaluate manager performance, practitioners will use:<\/p>\n<ul>\n<li>Sample attribution analysis to tell us how the outperformance was achieved. <\/li>\n<li>Appraisal ratio analysis to compare Manager A&apos;s performance to other managers during the same period. <\/li>\n<li>Finally, a combination of the analyses to present a more balanced assessment of the manager&apos;s skill. <\/li>\n<\/ul>\n<h2>Attribution Analysis Output<\/h2>\n<p>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.<\/p>\n<p>$$ \\small{\\begin{array}{c|cc|cc|ccc}<br \/>\n\\textbf{Market} &#038;\t \\textbf{Manager A} &#038; &#038; \t\\textbf{Benchmark} &#038; &#038;\t \\textbf{Attribution} &#038; \\textbf{Effects} &#038; &#038; \\\\ \\hline<br \/>\n\t&#038; \\textbf{Weight} &#038;\t\\textbf{5-yr} &#038;\t\\textbf{Weight} &#038;\t\\textbf{5-yr} &#038;\t\\textbf{Allocation} &#038;\t\\textbf{Selection +} &#038;\t\\textbf{Total} \\\\<br \/>\n&#038; &#038; \\textbf{return} &#038; &#038; \\textbf{return} &#038; &#038; \\textbf{Interaction} &#038; \\\\ \\hline<br \/>\n\\textbf{Japan} &#038;\t51.0\\% &#038;\t12.4\\% &#038;\t60.0\\% &#038;\t11.5\\% &#038;\t-0.21\\% &#038;\t0.47\\% &#038;\t0.26\\% \\\\ \\hline<br \/>\n\\textbf{Australia} &#038;\t30.0\\% &#038;\t5.1\\% &#038;\t25.4\\% \t&#038; 4.1\\% &#038;\t-0.24\\% &#038;\t0.31\\% &#038;\t0.07\\% \\\\ \\hline<br \/>\n\\textbf{Hong Kong} &#038;\t15\\% &#038;\t8.9\\% &#038;\t10.0\\% &#038;\t10.1\\% &#038;\t0.04\\% &#038;\t-0.18\\% &#038;\t-0.14\\% \\\\ \\hline<br \/>\n\\textbf{Singapore} &#038;\t3.5\\% &#038;\t5.1\\% &#038;\t3.0\\% &#038;\t5.4\\% &#038;\t-0.02\\% &#038;\t-0.01\\% &#038;\t-0.03\\% \\\\ \\hline<br \/>\n\\textbf{New Zealand} &#038;\t0.5\\% &#038;\t8.75\\% &#038;\t1.0\\% &#038;\t9.1\\% &#038;\t0.00\\% &#038;\t0.00\\% &#038;\t0.00\\% \\\\ \\hline<br \/>\n\\textbf{Total} &#038;\t\\bf{100\\%} &#038;\t\\bf{9.42\\%} &#038;\t\\bf{100\\%} &#038;\t\\bf{9.25\\%} &#038;\t\\bf{-0.43\\%} &#038;\t\\bf{0.59\\%} &#038;\t\\bf{0.17\\%}<br \/>\n\\end{array}} $$<\/p>\n<p><strong>Key Takeaways:<\/strong><\/p>\n<ul>\n<li>The portfolio manager lost 43 bps of performance due to allocation decisions. For example, the manager&apos;s decision to overweight Australia lost 24 bps, because Australia underperformed the total MSCI Pacific benchmark.<\/li>\n<li>The manager did not make good weighting decisions over the five-year period. <\/li>\n<li>The portfolio manager gained 59 bps of performance from stock selection decisions. <\/li>\n<li>We can conclude from the attribution analysis that the manager is a good stock picker, especially for Japanese and Australian stocks. But the manager has not been as successful in choosing the markets to allocate assets<\/li>\n<\/ul>\n<p>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.<\/p>\n<h2>Appraisal Ratios<\/h2>\n<p>$$ \\begin{array}{c|c|c|c|c}<br \/>\n&#038;\t\\textbf{Manager A} &#038;\t\\textbf{Manager B} &#038; \t\\textbf{Manager C} &#038; \\textbf{Benchmark} \\\\ \\hline<br \/>\n\\text{Annualized} &#038;\t9.42 &#038;\t8.23 &#038;\t10.21 &#038;\t9.25 \\\\<br \/>\n\\text{return} &#038; &#038; &#038; &#038; \\\\ \\hline<br \/>\n\\text{Annualized} &#038;\t10.83 &#038;\t8.10 &#038;\t12.34 &#038;\t9.76 \\\\<br \/>\n\\text{Std. Dev} &#038; &#038; &#038; &#038; \\\\ \\hline<br \/>\n\\text{Sharpe} &#038;\t0.68 &#038;\t0.76 &#038;\t0.66 &#038;\t0.73 \\\\<br \/>\n\\text{ratio} &#038; &#038; &#038; &#038; \\\\ \\hline<br \/>\n\\text{Treynor} &#038;\t0.35 &#038;\t0.32 &#038;\t0.19 &#038;\t0.57 \\\\<br \/>\n\\text{ratio} &#038; &#038; &#038; &#038; \\\\ \\hline<br \/>\n\\text{Information} &#038;\t0.43 &#038;\t0.41 &#038;\t0.30 &#038;\t0.00 \\\\<br \/>\n\\text{ratio} &#038; &#038; &#038; &#038; \\\\ \\hline<br \/>\n\\text{Sortino} &#038;\t0.82 &#038;\t0.51 &#038;\t1.03 &#038;\t0.97\\\\<br \/>\n\\text{ratio} &#038; &#038; &#038; &#038; \\\\<br \/>\n\\text{(MAR = 3%)} &#038; &#038; &#038; &#038; \\\\<br \/>\n\\end{array} $$<\/p>\n<p><strong>Key Takeaways:<\/strong><\/p>\n<ul>\n<li>Managers A and C have a higher volatility of returns than the benchmark. <\/li>\n<li>Manager A&apos;s Sharpe ratio is less than the benchmark&apos;s Sharpe ratio and less than Manager B&apos;s Sharpe ratio. Thus, for this period, we know Manager A certainly incurred more risk than the benchmark and Manager B did for the same amount of return generated. <\/li>\n<li>Given that Manager A has the highest Treynor and information ratios for this period, she has been able to produce a higher return relative to systematic risk. <\/li>\n<li>In addition, consider the manager&apos;s Sortino ratio of 0.82, not significantly higher than the Sharpe ratio, but again indicative of an ability to generate higher returns relative to downside risk.<\/li>\n<\/ul>\n<blockquote>\n<h2>Question<\/h2>\n<p>Which of the following statements is <em>least likely<\/em> true?<\/p>\n<ol type=\"A\">\n<li>A manager who over weights a sector that outperforms the benchmark will exhibit a positive allocation effect. <\/li>\n<li>A manager who over weights a sector that underperforms the benchmark will exhibit a negative allocation effect. <\/li>\n<li>A manager who over weights a sector that underperforms the benchmark will exhibit a positive allocation effect. <\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p><strong>The correct answer is C.<\/strong><\/p>\n<p>Answer choice C is incorrect, overweighting a sector that has done poorly relative to the benchmark will result in a negative allocation effect.<\/p>\n<p><strong>Answer choices A and B<\/strong> are both true statements. <\/p>\n<\/blockquote>\n<p>Reading 12: Portfolio Performance Evaluation<\/p>\n<p>Los 12 (p) Evaluate the skill of an investment manager<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Sample Evaluation To evaluate manager performance, practitioners will use: Sample attribution analysis to tell us how the outperformance was achieved. Appraisal ratio analysis to compare Manager A&apos;s performance to other managers during the same period. Finally, a combination of the&#8230;<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[571],"tags":[],"class_list":["post-33851","post","type-post","status-publish","format-standard","hentry","category-cfa-level-iii","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Evaluation of Investment Manager Skill - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Using a sample attribution analysis combined with performance appraisal ratios to make a thorough assessment of manager performance.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/evaluation-of-investment-manager-skill\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Evaluation of Investment Manager Skill - 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