- READING 31. EVALUATING PORTFOLIO PERFORMANCE
overview- a demonstrate the importance of performance evaluation from the perspective of fund sponsors and the perspective of investment managers;
- b explain the following components of portfolio evaluation: performance measurement, performance attribution, and performance appraisal;
- c calculate, interpret, and contrast time-weighted and money-weighted rates of return and discuss how each is affected by cash contributions and withdrawals;
- d identify and explain potential data quality issues as they relate to calculating rates of return;
- e demonstrate the decomposition of portfolio returns into components attributable to the market, to style, and to active management;
- f discuss the properties of a valid performance benchmark and explain advantages and disadvantages of alternative types of benchmarks;
- g explain the steps involved in constructing a custom security-based benchmark;
- h discuss the validity of using manager universes as benchmarks;
- i evaluate benchmark quality by applying tests of quality to a variety of possible benchmarks;
- j discuss issues that arise when assigning benchmarks to hedge funds;
- k distinguish between macro and micro performance attribution and discuss the inputs typically required for each;
- l demonstrate and contrast the use of macro and micro performance attribution methodologies to identify the sources of investment performance;
- m discuss the use of fundamental factor models in micro performance attribution;
- n evaluate the effects of the external interest rate environment and active management on fixed-income portfolio returns;
- o explain the management factors that contribute to a fixed-income portfolio’s total return and interpret the results of a fixed-income performance attribution analysis;
- p calculate, interpret, and contrast alternative risk-adjusted performance measures, including (in their ex post forms) alpha, information ratio, Treynor measure, Sharpe ratio, and M2;
- q explain how a portfolio’s alpha and beta are incorporated into the information ratio, Treynor measure, and Sharpe ratio;
- r demonstrate the use of performance quality control charts in performance appraisal;
- s discuss the issues involved in manager continuation policy decisions, including the costs of hiring and firing investment managers;
- t contrast Type I and Type II errors in manager continuation decisions.