Skip to content

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

A manager's stated mandate is U.S. large-cap value, but returns-based style analysis over rolling windows shows a growing weight in small-cap growth. What is this phenomenon called, and why does it matter to the plan sponsor?

This is style drift, a departure from the stated mandate. It matters because it alters the fund's risk exposures, disrupts the sponsor's intended asset allocation and diversification across managers, and makes the original benchmark an unsuitable yardstick for evaluating the manager.

  1. ATracking error; it lowers the Sharpe ratio automatically
  2. BStyle drift; it can change the fund's risk and undermine the sponsor's asset allocation and benchmark choiceCorrect
  3. CSurvivorship bias; it overstates historical returns of the peer group
  4. DWindow dressing; it only affects reported month-end holdings

Explanation

Style drift is a departure from the stated investment style. It changes the risk exposures the sponsor expected, can cause overlap or gaps across managers, and makes the original benchmark inappropriate for judging the manager. The other terms describe different issues.

Did you get it right without looking?

One question tells you little. A timed set on Portfolio Performance Evaluation shows your real accuracy, how long you take and where you lose marks.

Practise Portfolio Performance EvaluationFree diagnostic mock

More Portfolio Performance Evaluation questions