Clarifications

CFA Level III
#1

I had some questions :

  1. We know that a manager’s style return should be uncorrelated to his active management effect. If there are 2 portfolios X and Y, and the correlation between S and M is -0.04 for X and -1.14 for Y, you would choose Y right? Lower correlation?

  2. Can somebody explain allocation selection interaction effect? Is it a plug figure or the joint return of pure selection interact effect and within section interaction?

  3. We cannot write CFA after a person’s name on his business card in bold or the same size as his name right? It should be a smaller font. Are there any other restrictions like that?

  4. Is liability noise in the curriculum?

Good luck to all! :slight_smile: I hope we all ace it and get it over with for good.

#2

  1. The correlation can’t be lower than -1. Besides, “uncorrelated” leads to lower correlation in absolute value. So, you should choose the portfolio X.

  2. I think it’s a plug.

  3. No, we can’t and I think it’s all. Besides, I wonder if writing “Mr. Smith CFA” without a comma between “Smith” & “CFA” is acceptable?

  4. What’s this? :). I found “liability noise is non-market related exposure that causes uncertainty (demographics & probabilities)” but in 2012. So I hope it’s not relevant.

#3

I believe liability noise was on one of the more recent AM papers. All it relates to is the fact that when actuaries are trying to estimate the PBO and PV of liabilities it involves a lot of estimates (which creates “noise”). The smaller the plan the more liability noise because there are less lives to smooth out the assumptions.

#4

#3 isn’t a plug. It shows the joint affects of over/underweighting sectors and return on the portfolio vs benchmark. It’s generally very small but it’s a joint affect not a plug.

ASI RV = (Wp-Wb)(Rp-Rb)

#5

PreDRaR66 is correct, the “Allocation effects” by it self under Macro Attribution is the plug, but under Micro Attribution, the “Allocation/Selection Interaction Return” is the return from the joint effect of assigning weights to sectors and securities.

Just keep in mind that (Wp-Wb)(Rp-Rb) is for the specific sector you are looking at, and not the total portfolio and benchmark returns.

#6

To add to bazz and for memory purposes only pure sector allocation involves the total portfolio Benchmark return

Pure Sector Allocation = (Port weight - BM weight) * (BM sector return - BM overall return)

The two others only involve sector returns and weights.

#7

Here is the best way that I can think of to remember this.

In the link below, think of this…We are a portfolio manager and our mandate is to invest only in the utility sector, SPY is the broad sector ETF that tracks S&P500 (i.e Market return)…XLU is the ETF that tracks the utilities sector in S&P 500 (i.e this is our benchmark).

The fomula are just the areas of the rectangle in the image. Forget about subscripts and crap like that. The curriculum has an analogy similar to this with price and quantity and profits.

Here is all the clarifications you need

Hope this helps and anyone else in the future.