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CFA Level I · CFA Level I Exam · Benchmarking Returns

A fund's manager is judged against a custom benchmark of 60% equity index and 40% bond index, rebalanced annually. Over the year the equity index returned 20% and the bond index returned 5%. The fund returned 14.5%. Using the benchmark's starting weights, the fund's active return is closest to:

The active return is closest to 0.5%. The custom benchmark returned 0.6 times 20% plus 0.4 times 5%, which equals 14%. Subtracting this from the fund's 14.5% return leaves an active return of about 0.5 percentage points.

  1. A-1.5%Correct
  2. B0.5%
  3. C2.5%

Explanation

Benchmark return = 0.6(20%) + 0.4(5%) = 12% + 2% = 14%. Active return = 14.5% - 14% = +0.5%. Check: the fund beat 14% by half a point. A mistake of using the weights reversed gives 0.4(20)+0.6(5)=11%, and 14.5-11=3.5%, which is not offered.

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