CFA Level I · CFA Level I Exam · Benchmarking Returns
A portfolio returned 9.4% over the year while its benchmark returned 7.1%. The active return of the portfolio is most likely:
Active return equals the portfolio return minus the benchmark return. Here 9.4% minus 7.1% gives 2.3%. The portfolio outperformed its benchmark by 2.3 percentage points. Summing the two returns or quoting the benchmark alone does not measure the manager's value added relative to the benchmark.
- A2.3%Correct
- B7.1%
- C16.5%
Explanation
Active return is portfolio return minus benchmark return: 9.4% - 7.1% = 2.3%. Adding the returns gives 16.5%, which has no meaning as an active return. The benchmark return alone is 7.1%.
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