Absolute return benchmark

CFA Level III Portfolio Management
#1

Hi,

I am struggling to understand the correct answer of one of the mock question (Asset Allocation Babb , Q2)

The questions asks if a suggested benchmark is correct in being a liability-based benchmark and an absolute return benchmark.

The question refers to this text:

[question removed by moderator]

I do not understand the part in bold, what is the link between the return requirement and the benchmark being an absoulte return benchmark since the latest in based on a fixed income securities and not simply a target return of 5%?

The high quality fixed income securities could very well turn out to give a return different than 5% no?

Any help appreciated.

The CFAI text book defines an absolute return benchmarl as simply a minimum target return that the manager is expected to beat (e.g 9%).

#2

i’ve not looked at these questions yet… seems like subtle use of wording.

i.e.

“based on” doesn’t really mean much.

“match the annual disbursements” this is quite precise language, and coupled with “consistently generate a minimum” gives you the answer.

I don’t like it much, but it’s typical cfai…

#3

Really confusing from my side. Drafted ‘ad-hoc’ to be open to different interpretations.

> Absolute-return benchmark : “absolute value” like you say e.g. 9%;

> Liability-based Benchmark is your liabilities return, given you aim to track your liabilities.

In the above question seems that the sentence pools together the two definitions by saying “yes 5% tracking liabilities it’s an absolute liability-based benchmark…”…NO GOOD, NO ENCOURAGING.

Best of luck