CFA Level 3 - Performance Evaluation
and GIPS (thank you mtbrennan7)
questions with answers.
Account Return if External Cash Flow at Beginning of Evaluation Period Formula ANS -
Account Return if External Cash Flow at End of Evaluation Period Formula ANS -
Money Weighted Rate of Return Formula ANS -
Time Weighted Vs Money Weighted Return ANS -TWRR advantages: not influenced by external cash
flow activity; appropriate when managers have little control over external cash activity
TWRR Disadvantages: Account valuations needed for every date of external cash flow. Admin Costs may
be higher because of this.
MWRR Advantages: appropriate if mgr has control on external cash flows; valuations only needed at
start and beg. of period
MWRR Disadvantages: sensitive to size/timing of external cash flows. Not appropriate if mgr has no
control on cash flows.
Portfolio Return P Formula (broken into returns due to Market, Style, and Active Management ANS -
Determining Appropriateness of an Index as the Benchmark to Portfolio ANS -Compare the market
capitalizations between the subject portfolio and respective benchmark index (median, average,
weighted average)
Compare the portfolio beta to the potential benchmark/index
A Valid Benchmark Should meet the following 7 Criteria: ANS -1. Specified in Advance
2. Appropriate
3. Measurable
, 4. Unambiguous
5. Reflective of Current Investment Opinions
6. Accountable
7. Investable
S-A-M-U-R-A-I
Seven Primary Types of Benchmarks in use: ANS -1. Absolute
2. Manager Universe
3. Broad Market Indices
4. Style Indices
5. Factor-Model Based
6. Returns-Based
7. Custom Security-Based
Construction of Customer Security Based Benchmark 5 steps ANS -1. Identify important elements of
investment process
2. Select securities consistent
3. Weight the securities (including cash) to reflect manager's process
4. Review and adjust as needed to replicate
5. Rebalance custom benchmark on predetermined schedule
Median Account As Benchmark Drawbacks ANS -1. impossible to identify median manager in advance
2. Ambiguous
3. Benchmark is not investable
4. Impossible to verify appropriateness
5. Have to rely on compiler's representations that the accounts have been screened, input data
validated, and calculation methodology approved
and GIPS (thank you mtbrennan7)
questions with answers.
Account Return if External Cash Flow at Beginning of Evaluation Period Formula ANS -
Account Return if External Cash Flow at End of Evaluation Period Formula ANS -
Money Weighted Rate of Return Formula ANS -
Time Weighted Vs Money Weighted Return ANS -TWRR advantages: not influenced by external cash
flow activity; appropriate when managers have little control over external cash activity
TWRR Disadvantages: Account valuations needed for every date of external cash flow. Admin Costs may
be higher because of this.
MWRR Advantages: appropriate if mgr has control on external cash flows; valuations only needed at
start and beg. of period
MWRR Disadvantages: sensitive to size/timing of external cash flows. Not appropriate if mgr has no
control on cash flows.
Portfolio Return P Formula (broken into returns due to Market, Style, and Active Management ANS -
Determining Appropriateness of an Index as the Benchmark to Portfolio ANS -Compare the market
capitalizations between the subject portfolio and respective benchmark index (median, average,
weighted average)
Compare the portfolio beta to the potential benchmark/index
A Valid Benchmark Should meet the following 7 Criteria: ANS -1. Specified in Advance
2. Appropriate
3. Measurable
, 4. Unambiguous
5. Reflective of Current Investment Opinions
6. Accountable
7. Investable
S-A-M-U-R-A-I
Seven Primary Types of Benchmarks in use: ANS -1. Absolute
2. Manager Universe
3. Broad Market Indices
4. Style Indices
5. Factor-Model Based
6. Returns-Based
7. Custom Security-Based
Construction of Customer Security Based Benchmark 5 steps ANS -1. Identify important elements of
investment process
2. Select securities consistent
3. Weight the securities (including cash) to reflect manager's process
4. Review and adjust as needed to replicate
5. Rebalance custom benchmark on predetermined schedule
Median Account As Benchmark Drawbacks ANS -1. impossible to identify median manager in advance
2. Ambiguous
3. Benchmark is not investable
4. Impossible to verify appropriateness
5. Have to rely on compiler's representations that the accounts have been screened, input data
validated, and calculation methodology approved
