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

Which is a recognized limitation of returns-based style analysis compared with holdings-based style analysis?

Returns-based style analysis infers exposures from past fund returns regressed on style indices, so it can lag real changes in holdings and depends on the chosen indices and window. Its advantage is that it does not need position-level disclosure.

  1. AIt infers exposures from historical returns, so it can lag actual changes in holdings and is sensitive to the chosen style indicesCorrect
  2. BIt requires full disclosure of every security position each day
  3. CIt cannot be applied to mutual funds
  4. DIt ignores returns and uses only portfolio weights

Explanation

Returns-based analysis needs only fund returns and index returns, so it is cheap and applicable to funds without transparent holdings. Its drawbacks are estimation lag, sensitivity to the index set and window, and imprecision when indices are correlated.

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