FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A fund returned 11.0% over the year. Its custom style benchmark is 60% Index A and 40% Index B. Index A returned 12.0% and Index B returned 6.0%. What is the fund's excess return versus the style benchmark?
The style benchmark returned 0.6 times 12% plus 0.4 times 6%, which is 9.6%. Subtracting this from the fund's 11.0% gives an excess return of 1.4%. Using an equal-weight average of the indices would wrongly produce 2.0%.
- A1.4%Correct
- B2.0%
- C-1.6%
- D5.0%
Explanation
Benchmark return = 0.6 x 12.0% + 0.4 x 6.0% = 7.2% + 2.4% = 9.6%. Excess return = 11.0% - 9.6% = 1.4%. Using the simple average of 9.0% would give 2.0%, which ignores the weights.
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