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FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

A fund's benchmark is 50% Sector A and 50% Sector B. The manager holds 50%/50% in the same sectors, so there is no allocation effect. Sector A: portfolio return 8%, benchmark return 6%. Sector B: portfolio return 3%, benchmark return 5%. A risk committee reviews attribution. Which conclusion is correct?

Total active return is zero because the sector selection effects offset: plus 1% in Sector A and minus 1% in Sector B, with no allocation effect since weights match the benchmark. The manager was active in selection, but the net result shows mixed skill across sectors.

  1. ATotal active return is 0%, with selection effects of +1% and -1% offsetting, so sector-level skill is mixedCorrect
  2. BTotal active return is +2% because Sector A outperformed
  3. CTotal active return is -2% due to Sector B
  4. DTotal active return is 0% and indicates no stock-picking activity

Explanation

With equal weights, selection = 0.5 x (8-6) = +1% for A and 0.5 x (3-5) = -1% for B. Sum = 0, so active return is 0 although the manager did make active selection decisions that offset. The last option is wrong because zero net does not mean no activity.

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