Investment Manager Selection

Question 1

Type II error

Answer 1

Type II error occurs when a manager who subsequently outperforms, or performs in line with, expectations is not hired

typically less psychologically troubling than a Type I error.

Question 2

Type I error

Answer 2

when a manager is hired or retained who subsequently underperforms expectations. Rejecting H0 : manager has no skill

Question 3

Return Based Style Analysis (RBSA)

Answer 3

• straightforward
• comparable across managers and through time
• objectuve check not subject to window dressing
  BUT
• imprecise
• may not reflect current future portfolio exposures

Question 4

Holding Based Style Analysis (RBSA)

Answer 4

• Bottom up approach
• classifie actual holdings in a portfolio at a point in time
• comparable across managers and through time
• more accurate view of risk exposure

BUT

• subject to window dressing
• complex, computational effort

Question 5

when to use Style analysis ?

Answer 5

• understand the manager’s risk profile
• for strategies that hold publicly-traded securities where pricing is frequent.
• for other strategies for due diligence

Question 6

Capture ratio

Answer 6

help evaluate consistency between stated investment process and reported investment performance

Question 7

Behavioral inefficiency

Answer 7

• Created by the actions of other participants in the market.
• Temporary, lasting long enough for the manager to identify and exploit them before the market price and perceived intrinsic value converge.

Question 8

Structural inefficiencies

Answer 8

• Created by external or internal rules and regulations.
• can be long lived
• assume a continuation of the rules and regulations rather than a convergence.