FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A pension fund evaluates an active equity manager against a custom benchmark. Which of the following is the most important property of a valid benchmark for performance evaluation?
A valid benchmark must be investable and specified in advance, so the manager's results can be compared with a passive alternative that was actually available. Benchmarks selected after the period or built from top performers bias the evaluation and do not measure skill.
- AIt is investable and specified in advance, so the manager could have held it as a passive alternativeCorrect
- BIt always includes the highest-returning stocks in the manager's universe
- CIt is chosen after the evaluation period to match the manager's realized holdings
- DIt has the lowest possible volatility among available indices
Explanation
A valid benchmark should be unambiguous, investable, measurable, specified in advance and reflect the manager's investment style. Choosing it after the fact or picking the best performers builds in bias and prevents a fair comparison.
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.
More Portfolio Performance Evaluation questions
- A risk manager wants to estimate ex-ante tracking error for an equity fund. Which approach is most appropriate for a portfolio whose active …
- A fund has an active risk (tracking error) of 3% per year relative to its benchmark. Assuming active returns are normally distributed with a…
- 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-ca…
- A portfolio manager's performance is compared with a benchmark. Which of the following is a required property of a valid benchmark under sta…
- A fund returned 12% in a year when the risk-free rate was 3% and the fund's return standard deviation was 18%. The market portfolio returned…
- A portfolio manager's equity portfolio is benchmarked to a broad index. In a Brinson-Fachler style attribution, the manager overweights a se…