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FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds

A fund of funds evaluates a manager who started two funds, one of which closed after poor results. The manager presents only the surviving fund's 8-year record. Which bias is most directly present, and what is its effect on the record?

This is survivorship bias: showing only the surviving fund excludes the failed one, so the record overstates the manager's typical performance and skill. Investors should request the full history of all funds the manager has run.

  1. ASurvivorship bias, which overstates the apparent performanceCorrect
  2. BLook-ahead bias, which understates performance
  3. CSelection of benchmark bias, which lowers volatility only
  4. DStale pricing bias, which raises returns

Explanation

Omitting the closed fund removes the poor performer, so the presented record reflects only the success. This is survivorship bias and inflates average returns and the apparent skill of the manager.

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