CFA Book 5 Copy Flashcards

Question

trading | implementation shortfall

Answer 1

• metric to measure trading costs • = (paper gain - actual gain) / paper investment • actual trading vs paper trading • actual trade price vs decision trade price (aka arrival price, strike price) ◎ decision price has no costs • 4 categories ◎ explicit costs ◎ realized p/l ◎ delay, slippage cost ◎ missed trade opportunity • can be share weighted • can be dollar or % of decision price

Answer 2

* commission * realized p/l = (actual - latest possible) / decision \* % of order * delay p/l = (latest possible - decision) / decision \* % of order * missed opportunity = (ending - decision) / decision \* % of order * ALL THESE COSTS ARE DIV BY ORIGINAL SHARE \* ORIGINAL DECISION PRICE!!!

Answer 3

1. Calc Ri = alpha + beta \* Rm; assume alpha = 0 2. subtract Ri from prev calced % cost to find 'market adjusted implementation shortfall' • negative cost is good

Answer 4

• pros: ◎ easy to understand ◎ easy to calc ◎ quickly applied to trading decisions ◎ good for small trades, non-trending mkt • cons: ◎ bad for large volume trades ◎ possible to game ◎ not include delayed/unfilled order ◎ no include mkt movement/trade volume

Answer 5

• pros: ◎ see cost of implementation ◎ see time vs price trade off ◎ decompose costs ◎ can be used in optimizer ◎ no gaming • cons: ◎ novel to traders ◎ much data and analysis

Answer 6

* liquidy: volume, mkt cap, spread, price * size of trade vs liquidity * trading style: more aggressive \>\> higher costs * momentum (buying stocks costs more when mkt going up) * risk

Answer 7

* can use econometric model regression to forecast cost and adjust size (ex ante) * can use to evaluate trades (ex post) * inputs: security liquidity, trade size, trade style, momentum, risk * based on microstructure

Answer 8

1. information-motivated: time sensitve \>\> mkt order 2. value-motivated: price sensitive \>\> limit order 3. liquidity-motivated: time sensitive \>\> mkt order 4. passive: price sensitive \>\> limit order 5. dealer/MM 6. day trader

Answer 9

1. liquidity at any cost: information 2. costs-not-important: information, liqudity 3. need-trustworthy-agent: not information 4. advertise-to-draw-liquidity: not information 5. low-cost-whatever-the-liquidity: passive and value

Answer 10

• automated trading using algorithms • 1/4 of all trades • 3 types: ◎ logical participation strat: simple, implemenation shortfall ◎ opportunistic strat: increases when liquidity increases ◎ specialized strat: various

Answer 11

• goal: minimize trading impact by breaking trade up into smaller parts • 3 types: ◎ VWAP: trade volume weighted ◎ TWAP: done evenly over time ◎ % of volume: trades % of total volume until trade is finished

Answer 12

* goal: minimize opportunity costs thru trading early \>\> trading early in day to avoid not executing * aka arrival price strategy

Answer 13

• security acquisition/liquidation the best way • similar to prudence (security selection) • 4 traits: ◎ cannot be judged independently ◎ not known ex ante ◎ only know ex post over time and over multiple trades ◎ relationships and practices are important as is diligence

Answer 14

• 3 Parts: ◎ processes ◎ disclosures ◎ record keeping • maximize portfolio value using best execution • procedures and policies \>\> measure and manage • provide clients: info and conflicts • record keeping: policies/compliance and disclosures

Answer 15

* faced by dealers/mm * those most willing/anxious to trade against the dealers bid or ask may be the most well-informed (ie information traders)

Answer 16

1. investor situation/goals 2. capital markets changes (eg. business cycle) 3. portfolio asset values • riskier assets will become larger % over time

Answer 17

rebalancing at pre-determined, regular intervals • pros: disciplin • cons: portfolio can become too unbalanced between rebalancing

Answer 18

• aka PPR, percent range rebalancing, interval rebalancing • tolerance bands, corridors = T +/- (T \* P) ◎ T = asset allocation % ◎ P = max % chg • P is specific to each asset class

Answer 19

• 5 factors 1. high trans costs \>\> higher corridor 2. higher risk tolerance \>\> higher 3. higher corr with other assets \>\> higher 4. higher asset vol \>\> lower 5. higher other portfolio assets vol \>\> lower • overall: sell winners, buy losers • concave returns

Answer 20

depends on mkt trends and vol

Answer 21

1. buy-and-hold: no rebalance; linear returns 2. constant mix: calendar and PPR; sell winners, buy losers; concave returns 3. constant proportion portfolio insurance (CPPI): buy winners, sell losers; convex returns

Answer 22

• aka CPPI • target weight equities investment = M \* (portfolio value - floor value) = M \* cushion ◎ M = constant proportion \> 1 and does not change • if M = 1 \>\> buy-and-hold • if M \< 1 \>\> CM • overall: buy winners, sell losers • convex returns

Answer 23

* mkt trends in one direction: best(CPPI, buy/hold, CM)worst * mkt mean reverts: best(CM, b/h, CPPI)worst

Answer 24

* CPPI: absolute and relative risk tolerance pos corr with wealth (larger corr than others); dynamic cash floor that increases wth mkt decline * B/H: absolute and relative risk tolerance pos corr with wealth; static cash floor * CM: absolute risk corr w/ wealth, relative risk tolerance proportional to wealth (relative risk aversion); decreasing cash floor (constant %)

Answer 25

1. wealth 2. time horizon (time passing, events) 3. liquidity 4. taxes 5. legal and regulatory (for institutional)

Answer 26

institutions: pension fund, endowment, foundation that has multiple managers beneath it managing investments

Answer 27

• feedback and control 1. evaluates policy performance 2. directs managers to most added and lost value 3. quantifies active management and policy decision performance 4. provides other strats that may be successful 5. feedback on IPS implementation

Answer 28

• provides details of performance and allows comparison to benchmarks

Answer 29

1. performance measurement: rates of returns 2. performance attribution: sources of performance 3. performance appraisal: causes of those sources (investment decisions, overall mkt , chance, etc)

Answer 30

these must be taken into account when calculating return

Answer 31

* geometric mean * compound rate of growth over multiple subperiods (delineated by external cash flows) * does not take into account timing of external CF or funds invested during each period \>\> evals manager decision, not investors external CF timing * used for GIPS and manager eval * harder to calc than MWRR * aka TWRR

Answer 32

* IRR * PV of CFs * takes timing into account of external CF and funds invested during each period \>\> groups together manager performance and investor external CF timing * not good manager eval unless they control external CF timing * easier to calc than TWRR * aka MWRR

Answer 33

* if external CFs are large and returns are volatile, TWRR and MWRR can be very different * TWRR to measure manager's performance because it excludes effects of investors external CF decisions (unless manager controls those decsions)

Answer 34

creating a mark for a security when none is directly available and looking at dealer quotes on a similar security

Answer 35

1. market 2. management style 3. active management • P = M + S + A ◎ P = manager's portfolio return ◎ M = market return (not benchmark) ◎ S = B - M; B = benchmark (proxy for style) ◎ A = P - B

Answer 36

1. Specified in advance 2. Appropriate 3. Measurable 4. Unambiguous 5. Reflective of managments current investment opinions 6. Accountable 7. Investable • SAMURAI

Answer 37

1. absolute 2. manager universes 3. broad market indices 4. style indices 5. factor-model-based 6. returns-based 7. custom security-based

Answer 38

* absolute return * pro: simple * con: not investable

Answer 39

* median manager performance from broad unverise of funds * pros: measurable * cons: no advance ID, ambiguous, uninvestable, appropriateness unverifiable, fund sponsors have to rely on 3rd party compiler, survivor bias (upwards)

Answer 40

* broad mkt like S&P, etc * pros: understandable, unambiguous, investable, measurable, in advance * cons: often used when manager's style is not the same (eg. small cap style)

Answer 41

* specific portion of asset category (eg. large cap equities) * pros: understandable, usually investable * cons: some indices are not smart investment strats, mis-classifying style

Answer 42

* based on a factor model * pros: insight into manager's style by defining factors * cons: unintuitive, difficult to calc, abiguous due to getting model correct

Answer 43

* regressing time series of manager returns against various style indices to determine composite style benchmark * intuitive, meets benchmark criteria, use when only have acct returns * cons: style indices may not reflect manager's style, enought data, not work if manager chgs style

Answer 44

* composite of manager's allocations and investment process • meets benchmark criteria, continual monitoring, clear definition of allocation exposure (for sponsor allocation ease) * cons: expensive, impossible if lack of manager transparency (hedge funds)

Answer 45

1. ID important elements of manager's process 2. select securites based on the process 3. weight the securities based on the process 4. review and adjust 5. rebalance on predetermined schedule

Answer 46

1. systemic bias 2. tracking error 3. risk characteristics 4. coverage 5. turnover 6. positive active positions

Answer 47

• if corr of portfolio to benchmark are not close (ie beta ~ 1), then portfolio may have different factors than benchmark • where A = P - B, S = B - M, P = portfolio, B = benchmark, M = market ◎ active return (A) should not be corr with style return (S) ◎ S should be corr with P-M

Answer 48

std dev of P-B \< std dev of B-M P = portfolio B = benchmark M = market

Answer 49

systemic risk exposure should over time be the same for portfolio and benchmark

Answer 50

mkt val of securities in both portfolio and benchmark / mkt val of securities in portfolio

Answer 51

% of benchmark's total mkt val that is bot/sold during rebalancing

Answer 52

* active position = portfolio weight of the security - benchmark weight of the security * absence of security in portfolio \>\> neg active position * large number of neg active positions is bad

Answer 53

• difficult ◎ lack of transparency ◎ absolute return ◎ no definable style ◎ skewed returns (problem with sharpe) • 3 possibilities: ◎ value-added return: benchmark weights sum to zero ◎ separate long/short benchmarks that are then combined ◎ Sharpe ratio

Answer 54

• macro: ◎ fund sponsor level ◎ % or dollars ◎ measure decisions of sponsor • micro: ◎ portfolio manager level =measures value added by manager • CFA test focuses on macro

Answer 55

1. policy allocations 2. benmarket returns 3. portfolio returns, valuations, external cash flows • when using %, returns are calced at individual manager level • when measuring in dollars, portfolio valuation and external CF are required to eval sponsor's policies

Answer 56

1. net contributions 2. risk-free asset 3. asset categories 4. benchmarks 5. investment managers 6. allocations effects (plug number)

Answer 57

* layer 2 * calcs the risk-free portion of the return on the beginning balance

Answer 58

• layer 3 • calcs the asset clase return - risk-free return • R = sum(Wa \* (Ra - Rf)) ◎ a = asset class ◎ R = return ◎ W = weight

Answer 59

• layer 4 • calcs benchmark return - asset class return • sum(Wa \* Wb \* (Rb - Ra)) ◎ a = asset class ◎ b = benchmark return for each manager ◎ W = weight ◎ R = return

Answer 60

• layer 5 • calcs active return - benchmark return • sum(Wa \* Wm \* (Rm - Rb)) ◎ a = asset class ◎ m = each manager ◎ W = weight ◎ R = return

Answer 61

* layer 6 * plug number to make: begin value + layers 1-5 + allocation effects = end value

Answer 62

• compares portfolios to their benchmarks • 3 layers: ◎ pure sector allocation: diff from benchmark based on diff asset allocation ◎ within-sector selection: diff from benchmark due to stock picking ◎ allocation/select interaction: overlap of diff asset allocation + stock picking

Answer 63

R = sum[(Wm,i - Wb,i) \* (Rb,i - Rb,total)] ◎ Wm,i = manager sector weight ◎ Wb,i = benchmark sector weight ◎ Rb,i = benchmark sector return ◎ Rb,total = benchmark overall return • diff from benchmark based on diff asset allocation

Answer 64

R = sum(Wb \* (Rm - Rb)) ◎ m = manager decision ◎ b = benchmark ◎ W = weight ◎ R = return • diff from benchmark due to stock picking

Answer 65

R = sum((Wm - Wb) \* (Rm - Rb)] ◎ m = manager decision ◎ b = benchmark ◎ W = weight ◎ R = return • overlap of diff asset allocation + stock picking

Answer 66

• use multifactor model to discover source of portfolio returns; coefficients for the factors indicate importance • 4 components: ◎ ID fundamental factors for systematic returns ◎ determine portfolio and benchmark exposure to factors at beginning of period ◎ determine manager's active exposure (manager vs benchmark) to factors ◎ measure active impact • similar to returns-based style analysis

Answer 67

mico performance ◎ pros: disects manager's performance between sectors and securities, easy ◎ cons: difficulty of defining appropriate benchmark fundamental factor model ◎ identifies factors beyond secors and securities ◎ cons: exposure to factors needs to be determined before starting, difficult

Answer 68

• main factors: duration and interest rates (different from equities) • simulations of expected external interest rate environment to measure manager's contribution • sum of two calcs: ◎ external interest rate environment ◎ manager's contribution

Answer 69

2 calcs: ◎ if rates follow along the rate curve (expected interest rate effect) ◎ benchmark return based on what actually happened (unexpected interest rate effect) ◎ sum of these two = external interest rate effect = what the portfolio could have passively earned with benchmark

Answer 70

1. interest rate management effect (ie risk-free layer): how well mng predicts interest rate changes 2. sector/quality management effect (sectors diff from the risk free): sector picking 3. security-selection effect (bond picking within the sector) 4. trading effect (plug value)

Answer 71

1. alpha (aka Jensen's ex alpha or ex post alpha) 2. information ratio (IR) 3. Treynor measure 4. Sharpe ratio 5. M^2 (Modigliani ^ 2)

Answer 72

beta: Jensen's alpha and Treynor measure std dev of portfolio returns: sharpe ration and M^2 • beta has to do with systemic risk and std dev captures all risk • systemic risk is related to the SML and CAPM (return vs beta); total risk is related to CAL and CML (return vs std dev)

Answer 73

both are excess return over the std dev of that return

Answer 74

* CAPM and SML predict portfolio (asset) return = Rp = Rf + B \* (Rm - Rf) * alpha = actual return - Rp

Answer 75

``` Tp = (Rp - Rf) / Bp Bp = portfolio beta ```

Answer 76

Sp = (Rp - Rf) / std dev of a

Answer 77

M^2p = Rf + (Rp - Rf) / std dev of p \* std dev of market •

Answer 78

Treynor is divided by beta (systemic risk), Sharpe by std dev (all risk) • provides portfolio return if it had the same risk as the market

Answer 79

IRp = active return / active risk = (Rp - Rb) / std dev of (Rp - Rb)

Answer 80

both based on CAPM assumptions (systemic risk model)

Answer 81

alpha, Treynor, Sharpe

Answer 82

by using a benchmark, which has a systemic risk factor as part of its composition

Answer 83

* plot alpha vs time with significance (confidence interval) bands around 0 * null hypothesis is alpha = 0

Answer 84

* aka MCP * continual manager monitoring * regular, periodic manager reviews (similar to initial interview) * assessment of costs of removing manager vs benefits (like NPV analysis)

Answer 85

* null hypothesis: manager adds no value * type 1: incorrectly reject null \>\> keep bad manager * type 2: fail to reject null hypothesis \>\> fire good manager

Answer 86

• 2 components 1. effect of external interest rate environment: ◎ return on risk-free benchmark assuming moving along the curve ◎ return due to actual changes in interest rates 2. contribution of manager: ◎ interest rate management ◎ sector management ◎ selection (bond picking) ◎ trading

Answer 87

* aka linked IRR * proxy for TWRR * calculate MWRR over frequent time periods and then chain-link the returns over the entire period

Answer 88

R = CG + CF + C ◎ R = domestic return ◎ CG = cap gains on asset ◎ CF = dividends on asset ◎ C = e \* (1 + CG + CF); e = % chg in foreign currency value

Answer 89

decompose into: 1. yield in foreign currency 2. capital gains in foreign currency 3. currency contribution • R = sum(Wm \* CGm) + sum(Wm \* Im) + sum(Wm \* Cm) ◎ W = portfolio weight in foreign market m ◎ CG = % cap gains ◎ I = % yld on mkt ◎ C = e \* (1 + CG + I); e = % chg in foreign currency • does not include security selection and benchmark

Answer 90

``` local = foreign currency base = domestic currency ```

Answer 91

R = sum(Wm \* Ri,loc) ◎ Ri,loc = local market return for foreign mkt m

Answer 92

Rsecsel = sum(Wm \* Rm,secsel) ◎ Rsecsel = foreign return attributable to mng ◎ Wm = portfolio weight of mkt m ◎ Rm,secsel = portfolio - benchmark return for market m (return attrib to mng)

Answer 93

Rportfolio = sum(Wm \* Rm) + sum(Wm \* (Rm,portfolio - Rm,benchmark)) + sum(Wm \* Im) + sum(Wm \* Cm) ◎ W = portfolio weight in foreign mkt ◎ Im = yld of foreign mkt m ◎ C = currency effect of foreign mkt m • includes security selection and benchmarks • no comparison to global benchmark (no mkt allocation)

Answer 94

effects from manager selecting which mkts to invest in (vs securities)

Answer 95

* global benchmark index in domestic currency * Rgb = sum(Wm,gb \* Rm,gb) where Wm,gb = weight in global benchmark and Rm,gb,dom = return of mkt m in domestic currency * gb weights and return

Answer 96

sum((Wm,portfolio - Wm,gb) \* Rm ◎ Rm = return on mkt m in foreign currency ◎ gb = global benchmark • aka sector allocation contribution

Answer 97

sum(Wm,portfolio \* Cm,portfolio - Wm,gb \* Cm,gb) ◎ W = weight in foreign mkt ◎ C = currency effect = Rdomestic - Rforeign ◎ gb = global benchmark • sum all weights for countries using same currency

Answer 98

``` Rportfolio = benchmark domestic return + mkt allocation contribution + currency allocation contribution + security selection contribution + yld component • = sum(Wm,gb \* Rm,gb,dom) + sum((Wm,port - Wm,gb) \* Rm,gb) + sum(Wm,port \* Cm,port - Wm,gb \* Cm,gb) + sum(Wm,port \* (Rm,port - Rm,gb) + sum(Wm,port \* Im) ```

Answer 99

passive: 1. fully hedging OR 2. no opinion and investing without regard to currency exposure • both these are wrong; true passive management would be matching the benchmark currency hedge

Answer 100

• 2-period active return = period 1 active \* (1 + period 2 benchmark) + period 2 active \* (1 + period 1 portfolio)

Answer 101

SSE = sum(Wp \* (Rp - Rb)) ◎ W = weight ◎ R = return ◎ p = portfolio ◎ b = benchmark

Answer 102

MAE = sum((Wp - Wb) \* (Rb,sector - Rb,total) ◎ W = weight ◎ R = return ◎ p = portfolio ◎ b = benchmark

Answer 103

1. each attributes contribution in the first period must be compounded at the benchmark rate of return over the second period 2. each attribute's contribution in the second period must be compounded with the portfolio return from the first period

Answer 104

• For each attribution over two periods: 1. Ra,total = Ra1 \* (1 + Rb2) + Ra2 \* (1 + Rp1) ◎ a = attribute return ◎ b = benchmark ◎ p = portfolio ◎ numbers indicate period 2. Total 2 period return including all attributes = sum all the attribute returns, Ra,totals

Answer 105

=portfolio and benchmark compounded returns

Answer 106

* multi-period attribute return cannot be found by summing or compounding the attibute's individual period returns * the attribute's proportion of active return can change from period to period

Answer 107

* std dev of portfolio returns * std dev of active returns (Rp - Rb)

Answer 108

* Sharpe ratio (Rp - Rf)/std dev of Rp * Information ratio (active return / activer return std dev)

Answer 109

allocating risk by manager • risk counterpart to performance attribution

Answer 110

1. absolute risk allocation (sector risk): asset class allocation 2. active risk allocation (selection risk): tracking error allocation

Answer 111

1. luck or skill? 2. mark to mkt issues 3. skewed returns (selling small puts) 4. survivorship bias within a firm's funds

Answer 112

1. by country (GDP, mkt cap) 2. int'l industries 3. style

Answer 113

for most of these global performance equations every number is a percent

Answer 114

ethical and professional standards for the presentation of investment performance results • minimum set of standards • est. 1999 • latest update 2010

Answer 115

* AIMR became CFAI * GIPS committe became IPC

Answer 116

existing and potential clients to compare firm performance across different countries and established practices

Answer 117

1. global, industry wide best practices for the calculation and presentation of investment performace \>\> comparability across diff countries and practices 2. accurate and unabiguous presentation of investment performance 3. comparable historical performace data 4. full disclousre and fair global competition without barriers 5. self-regulation

Answer 118

1. voluntary, minimum standards 2. requirements and recommendations (requirements compliance must be firm-wide) 3. only investment firms, not individuals, pension plans or consultants 4. min standard when local regulations do not exist 5. performance must include all 1)fee-paying 2) discretionary portfolios in composites grouped by strategy/objective 6. GIPS compliant 5 yr min at start, adding until a min of 10 yr 7. include non-GIPS data if before 2000 8. calc, presentation and disclosure requirements 9. accurate input data is critical 10. full disclosure and representation \>\> more than min GIPS 11. firms may need additional disclosure beyond GIPS 12. In local vs GIPS dispute, follow local and disclose 13. recommend process and controls to enforce GIPS 14. document policies to ensure client ownership of assets 15. 2011 jan 1, is start of updated 2010 GIPS

Answer 119

any firm in any country • GIPS data compliant with pre-2006 GIPS may still be used

Answer 120

• all the firm's assets: ◎ paying and non-paying ◎ discretionary and non-discretionary ◎ funds with sub-advisoris IF the firm controls their selection • all fee-paying, discretionary funds must be in at least on composite

Answer 121

an investment firm, subsidiary, or division held out to existing and potential clients as a distinct business entity • business entity: organizationally or functionally distinct from other units and retains discretion of assets managed

Answer 122

documentation of policies/procedures is required

Answer 123

XXX claims compliance with the GIPS and has prepared and pesented this report in compliance with the GIPS standards. XXX has not bene independently verified. • NO partial compliance

Answer 124

1A1. all data must be stored (ability to recreate calcs) 1A2. 2011+, fair value only 1A3. 2001+, monthly valuations; 2010+, monthly and large external CFs 1A4. 2010+, end-of-month (cal or bus day) valuation 1A5. 2005+, trade-date accounting (not settlement) 1A6. accrual accounting for interest accruing assets 1A7. 2006+, begin and end calendar year valuations

Answer 125

1B1.value at every external CF (not just large) 1B2. 3rd party valuations 1B3. accrue dividends as of ex-div (not payment) 1B4. accrual accounting for management fees

Answer 126

2A1. use total returns (incl unrealized cap gains); ie holding period return 2A2. use time-weighted rate of return (TWRR) 2A3. cash must included in total return calcs 2A4. returns must include direct actual (not estimated) fees 2A5. if direct fees cannot be calced, the bundled fees or % of bundle that is direct fees (no estimates) 2A6. composite returns must be asset-weighted (composite = multiple portfolio): ie. larger portfolios have more weight 2A7. 2006+, asset weighted comp return at least qtyly; 2010+, at least monthly

Answer 127

* allowed until 2005 * Rdietz = (end value - begin value - CF) / (begin value + .5 \* CF) * assumes CF occurs midway throught the period

Answer 128

• allowed until 2010 • Rmdietz = (end value - begin value - CF) / (begin value + sum(Wi \* CFi)) ◎ Wi = (cal days in month - cal date of CF) / cal days in month

Answer 129

• allowed until 2010 • aka MIRR, Modified Banker Administration Institute (BAI) Method • solving for R from: end value = sum(CFi \* (1 + R)^Wi + begin value \* (1 + R) ◎ Wi = proportion of period CF was in (or out, if outflow and negative) from the portfolio

Answer 130

* required 2010+ * effectively daily valuation (no estimates of CF impact): * daily returns: R = (end value - begin value)/ begin value * TWRR = geometric mean of daily value returns

Answer 131

* begin value + cash flow weighted return * R = sum((begin value i + sum(CFi \* Wi)) \* Ri) / sum(begin value i + sum(CFi \* Wi)) * i = portfolio i

Answer 132

R = (sum(end value i) - sum(begin value i) - sum(CFi)) / (sum(begin value i) + sum(CFi \* Wi)) • Wi = (CalDay - Di) / CalDay

Answer 133

2B1. return calc net of non-claimable taxes; reclaimable taxes are accrued

Answer 134

aggregation of discretionary portfolios into a single group that have a common objective or strategy • primary method for presenting performance to potential clients

Answer 135

asset weighted return of all the portfolios in the composite

Answer 136

3A1. ◎ all actual, fee-paying, discretionary portfolios must be in at least on composite (or many) ◎ non-paying, descretionary can be included ◎ non-discretionary cannot be included ◎ if portfolio goes discretionary \>\> non-discretionary, change is prospective 3A2. only include AUM with the firm 3A3. cannot combine simulated/model performance with actual performance 3A4. composites are defined by similar strategy or objective and include all portfolios that meet the specific composite definition 3A5. include new portfolios on a timely basis 3A6. terminated portfolios must be included upto last full period 3A7. cannot switch portfolios without documented IPS or composite definition change (always prospective) 38A. 2010+, carve-outs are not included in composite 3A9. if composite asset min exists, must be followed (all composite definition changes are prospective) 3A10. temporary removal or separate acct allowed for large CF inflows to avoid cash drag on composite

Answer 137

* 'the ability of the firm to implement its intended strategy' * IPS restrictions do not automatically disqualify until they stop ability to implement

Answer 138

3B2. to avoid cash drag from large CF inflows, use temporary separate account for CF

Answer 139

sub-set of portfolio's assets for generating a track record of specific asset class

Answer 140

read the material

Answer 141

1. 5 yr min performance presentation at start, growing to 10yr (less is ok if too new) 2. ID annual returns as gross/net of fees 3. 2011+, new composites returns presented EOY even if partial 4. 2011+, terminated composities returns to last day of existence 5. annual benchmark returns per portfolio 6. # of portfolios in composite EOY (unless 7. assets in composite EOY 8. total firm assets or total composite/total firm assets EOY 9. dispersion of composite's portfolios EOY eg. std dev (unless

Answer 142

5A2. 2011+, 3yr annualized ex-post std dev monthly returns for composite and benchmark (+ 3yr of a diff measure if firm doesn't like std dev) 5A3. include non-GIPS returns prior to 2000 5A4. comps and ports existing 5A5. 2006-2011, %comp that was carved out on annual basis 5A6. % of comp that is non-fee-paying 5A7. % of comps that are bundled fee 5A8.

Answer 143

• generally, composite performance is not portable to other firms • never to off-shoots or new firms (eg. manager starts his own firm) • an acquirer must keep performance if: ◎ managers remain with the acquirer ◎ decision process remains the same ◎ acquirer has documentation of past performance • acquirer has one year to bring acquired accts into line with GIPS

Answer 144

5B1. present gross of fee returns 5B2. present: ◎ cumulative comp and bench returns across all periods ◎ equal-weighted mean and median returns per comp ◎ qtrly, monthly returns ◎ annualized comp and bench returns for periods \>12 months 5B3. 2011+, 3yr annualized ex post std dev of monthly returns for every year for comp and bench 5B4. annual return for comp and bench 5B5. annualized std dev of monthly returns for comp and bench 5B6. additional ex post comp risk measures 5B7. \>10yrs of performance 5B8. comply with GIPS for all past periods 5B9. update presentations qtrly

Answer 145

1. publically traded real estate securities (eg. REITs) 2. CMBS 3. private debt investments, including commercial and residential loans that only receive interest and do not share in real estate value changes

Answer 146

open-ended and evergreen funds (no fixed capital levels or number of investors)

Answer 147

6A1-3. upto 2008, market value every 12 months; 2008+, qtrly; 2010+, qrtly at end of qtr 6A4-5. upto 2012, external valuation every 3 yrs; 2012+ annually (if client states otherwise, every 3 yrs) 6A6-7. returns less transaction costs qtrly 6A8. 2011+, income and capital components calced separately using TWRR 6A9. asset-weighted composite and component returns every qtr using TWRR

Answer 148

Ce = Co + sum(CFi \* Wi) ◎ Wi proportion of period the CF was in (inflow) or missing (outflow)

Answer 149

* % chg in property value after capital improvement and sales proceeds * Rc = (end value - begin value - CapX + sales) / capital employted

Answer 150

Ri = (Ya - Er - Id - Tp) / Ce ◎ Ya = gross investment income ◎ Er = nonrecoverable exp (leasing, maintenance) not directly reimbursed by tenants ◎ Id = interest on debt ◎ Tp = property tax

Answer 151

Rt = Rc + Ri

Answer 152

* sub-period returns = income return + capital return * total period return = TWRR of monthly returns

Answer 153

1. input data 2. calculation methodology 3. composite construction 4. disclosures 5. presentation and reporting

Answer 154

7A21. present both net-of-fees and gross-of-fees annualized SI-IRR of the composite for each yr since inception 7A22. 2011+, present SI-IRR of investments in fund of funds grouped by vintage year; gross of fund of fund fees

Answer 155

since inception IRR

Answer 156

report: 1. since inception paid-in capital 2. cumulatie committed capital 3. since inception distributions 4. total value to paid-in capital (investment multiple of TVPI) 5. cumulative distributions to paid-in capital (realization multiple or DPI) 6. Paid-in capital to committed capital (PIC multiple) 7. Residual value to paid-in capital (RVPI)

Answer 157

* present cumulative annualized SI-IRR for the benchmark that reflects the same strat and vintage year as composite * if no benchmark presented, explain why

Answer 158

* qtrly valuations * pre 2011, SI-IRR calced using daily cash flows

Answer 159

* 2011+, fair value valuations including accrued income * follow local laws and disclose any conflict * disclose portfolio valuation policies * 2011+, disclose subjective valuation * disclose if valuation hierarchy is different from GIPS

Answer 160

• recommended • source ranking for valuations 1. objective, unadjusted mkt prices 2. quotes prices 3. mkt-based inputs other than quoted prices 4. subjective

Answer 161

1. ID periods in composite prior to SMA inclusion 2. disclose non-compliant performance pre-2006 3. provide potential SMA clients with all similar SMA performance 4. deduct bundled fees from returns 5. for presenting sponsor-specific comps, must disclose sponsor 6. may link non-compliant pre-2006 performance to compliant 2006+

Answer 162

1. external valuation 2. valuator's fee not based on valuation 3. single value - not range 4. rotate valuators 3-5 yrs

Answer 163

1. most appropriate valuation method 2. must account for: reliable data, comparables, stage of deveopment, unique characteristics

Answer 164

read the material

Answer 165

* don't annualize when performance \< 1yr * calc return upto current data (don't leave out most recent) * disclose significant leverage/derivatives * can include but must disclose non-compliant performance pre-2001 * may include date compliant with old GIPS versions pre-2006 * benchmark stats that mirror composite (and if no benchmark, explain) * list and description of all composities is available upon request

Answer 166

review of an investment management firm's performance-measurement processes and procedures by an independent 3rd party verifier • verification is recommended but voluntary

Answer 167

1. firm has complied with all composite construction reqs on a firm-wide basis 2. firm's processes/procedures are designed to calc and present performance compliant to GIPS

Answer 168

1. must be firm-wide (not partial) 2. minimum compliant history is 1 yr

Answer 169

an agent of the main GIPS executive council to implement GIPS in individual countries

Answer 170

1. pre-liquidation: only looks realized p/l to calc taxes 2. mark-to-liquidation: look at all cap gains, realized or unrealized; ignores benefits of postponing cap gains taxes • 2011+, after-tax info must presented as supplemental

Answer 171

if portfolio/composite after-tax returns are presented, so should after-tax benchmark returns • must reflect client's tax status (in addition to 7 other reqs)

Answer 172

1. advance specification 2. appropriate 3. measurable 4. unambiguous 5. similar to mng's investment opinion 6. accountable 7. investable 8. reflective of client's tax status

Answer 173

helpful to use: ETFs, custom security benchmarks, shadow portfolios

Answer 174

these are not discretionary and should be addressed

Answer 175

1. year 2. total return 3. benchmark return 4. # of portfolios 5. composite dispersion 6. total assets at end of period either: ◎ % of firm assets OR ◎ total firm assets

Answer 176

special provisions only apply to that portion of the portfolio that are directly invested in real estate/PE, no more, no less

Answer 177

1. methodology used to calc returns (chain-linked, TWRR) 2. discretionary definition 3. internal valuation methods 4. freq of outside evaluator 5. 2011+, material valuation policy changes 6. 2011+, diff between external and reported valuations expanation 7. pre-2011, if component returns adjusted to have tota returns 8. pre 2006 non-compliance 9. deducted fees other than trans fee in gross-of-fee returns 10. deducted fees other than mng and trans fees in net-of-fee returns

Answer 178

SI-IRR since inception using qrtly CF

Answer 179

* vintage year * similar strategy

Answer 180

1. final liquidation date (if liqed) 2. freq of CF used in SI-IRR 3. vintage year of composite

Answer 181

read the material

Answer 182

1. assets valued annually 2. 2011+, valued at fair value

Answer 183

1. annualized SI-IRR 2. pre-2011, daily or monthly CF to calc SI-IRR; 2011+ daily CF (stock distributions included as CF) 3. net-of-fees include mng fees and carried interest 4. trans expenses deducted prior to return calc 5. fund of fund returns calced after deducting partnership fees, fund fees, expenses and carried interest

Answer 184

1. composite definitions must not change 2. primary funds and fund of funds must be included in at least one composite based on vintage year and start

Answer 185

1. vintage year and vintage year definition per composite 2. liquidation data if applicabe 3. valuation methodology; 2011+, materia chgs in methodology 4. industry guidelines followed (in addition to GIPS) 5. benchmark and return calc methodology 6. fees other than trans deducted prior to gross-of-fees calc 7. fees other than mng and trans fees deducted prior to net-of-fee calc 8. non-compliance pre-2006

Answer 186

In general, gross-of-fee returns has transaction fee deducted and net-of-fees has managment and transaction fees deducted

Answer 187

read the material

Answer 188

unit, division, dept, office that is organizationally or functionally different separated from others and retains discretion over assets it manages and autonomy over investment decision making process

Answer 189

1. firm compliance with GIPS without validation 2. firm compliance with GIPS with validation 3. composite compliance with GIPS with validation IF firm is already compliant

Answer 190

1. market transactions 2. market-based multiples 3. discounted CF