CFA Level III Performance Measurement Practice Questions
Question 1
A consultant runs returns-based style analysis on a fund using 36 monthly returns regressed on style indexes, with weights constrained to be non-negative and to sum to 100%. The fitted weights are 70% value, 25% small-cap and 5% cash, with an R-squared of 0.96. Which statement about this approach is accurate?
- A. It reveals security-level holdings, so it replaces holdings-based style analysis, and it works equally well with any number of monthly returns
- B. An R-squared of 0.96 means 96% of the fund's return came from manager skill
- C. It can infer effective style without holdings data, but results depend on the chosen indexes and window and may lag style changes
- D. The 5% cash weight proves the fund actually held that amount of cash during the period
Show answer and explanation
Correct answer: C. It can infer effective style without holdings data, but results depend on the chosen indexes and window and may lag style changes
Returns-based style analysis regresses fund returns on style indexes to estimate effective exposures. It needs only returns, but the weights are statistical estimates sensitive to index choice and window length.
- A. It uses returns only and cannot identify individual securities.
- B. R-squared shows how much return variation the style indexes explain, which is the opposite of skill.
- C. Correct: effective style is inferred from returns and depends on inputs.
- D. A fitted cash weight is an estimate of exposure, not a verified holding.
Question 2
In a Brinson-Fachler analysis, a portfolio holds 25% in Energy versus a benchmark weight of 35%. The portfolio's Energy holdings returned 12.0%, and the benchmark's Energy sector returned 9.0%. If interaction is reported as a separate term, what is the selection effect for Energy?
- A. 0.75%
- B. 1.05%
- C. -0.30%
- D. 3.00%
Show answer and explanation
Correct answer: B. 1.05%
Selection effect = benchmark weight x (portfolio sector return - benchmark sector return) = 0.35 x (12.0 - 9.0) = 1.05%. Interaction is (0.25 - 0.35) x 3.0 = -0.30%, reported separately.
- A. Uses the portfolio weight, which combines selection and interaction.
- B. Correct: 0.35 x 3.0% = 1.05%.
- C. This is the interaction term, not selection.
- D. Omits the weight and reports the raw return difference.
Question 3
A multifactor attribution of an equity portfolio shows active return of 0.90%. The portfolio has an active exposure of +0.40 to value (factor return 3.0%) and -0.20 to momentum (factor return 5.0%). What portion of active return is not explained by these two factors?
- A. 0.70%
- B. 0.20%
- C. 1.10%
- D. 1.20%
Show answer and explanation
Correct answer: A. 0.70%
Factor-explained active return = 0.40 x 3.0 + (-0.20 x 5.0) = 1.20 - 1.00 = 0.20%. The unexplained (specific) return is 0.90 - 0.20 = 0.70%.
- A. Correct: 0.90% - 0.20% = 0.70%.
- B. This is the factor-explained portion, not the residual.
- C. Adds the factor return to active return instead of subtracting it.
- D. This is the value-factor contribution alone, ignoring momentum and the total.
Considering a career as an advisor?
Explore careers at ParsonexQuestion 4
Fund Q returned 9.0% with a standard deviation of 14.0%. Its benchmark returned 8.0% with a standard deviation of 10.0%. The risk-free rate is 2.0%. What is Fund Q's M-squared relative to the benchmark?
- A. +1.00%
- B. -1.00%
- C. 7.00%
- D. -0.10%
Show answer and explanation
Correct answer: B. -1.00%
Fund Q's Sharpe ratio is (9 - 2) / 14 = 0.50. Scaled to the benchmark's 10% risk, its return is 2 + 0.50 x 10 = 7.0%. M-squared = 7.0 - 8.0 = -1.00%.
- A. Reverses the sign of the difference.
- B. Correct: 7.0% risk-matched return minus 8.0% benchmark return.
- C. Stops at the risk-matched return and does not compare it with the benchmark.
- D. Reports the Sharpe ratio difference (0.50 - 0.60) without scaling by risk.