CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
A portfolio manager's mandate sets a return objective of the benchmark return plus 2% with a maximum tracking risk of 3%. The benchmark returned 7.0% and the portfolio returned 8.5%. Relative to the objective, the portfolio's performance is most likely:
The required return is the benchmark's 7.0% plus 2%, or 9.0%. The portfolio earned 8.5%, so it fell 0.5% short of the objective. Although it beat the benchmark by 1.5%, that active return is below the 2% required.
- A0.5% below the required returnCorrect
- Bin line with the required return
- C1.5% above the required return
Explanation
The required return is 7.0% + 2% = 9.0%. The portfolio returned 8.5%, which is 0.5% below the target. Beating the benchmark by 1.5% is not sufficient since 2% was required.
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