FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A risk committee reviews a manager whose attribution shows consistently large positive selection effects but the manager's stated strategy is a top-down sector rotation approach. Which conclusion is most appropriate?
The committee should investigate the process. Attribution tests whether returns come from the sources the manager claims. A top-down sector rotator should earn mainly through allocation, so persistent large selection gains signal that returns arise from something other than the stated strategy.
- AThe results are inconsistent with the stated process, suggesting returns may come from a source other than the claimed strategy, so the process should be investigatedCorrect
- BThe results confirm the manager's skill since any positive attribution effect validates the strategy
- CSelection effects should be ignored because only allocation matters for top-down managers
- DThe attribution is invalid because selection effects cannot be measured at the sector level
Explanation
Attribution is used to check whether sources of return match the manager's stated process. A top-down rotator should show mainly allocation gains; large selection gains indicate a mismatch worth investigating. Option B ignores process consistency, and selection can be measured at sector level.
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