the quesiton is which one is less accurate:
Criterion 1: Style analysis will enable us to understand the active risks the manager has taken relative to the benchmark and which biases have consistently added to performance.
Criterion 2: Decomposing the portfolio’s historical returns will show whether the manager’s skills will allow the manager to consistently outperform over time.
Criterion 3: We could select two of the three managers that presented if our analysis shows that the correlation between their alphas is low.
And the answer is 2, why is it false?
I mean i know managers seldom consistently outperform but the statement is just saying decomposing the historical return could do the analysis.
This basically boils down to the saying “Past returns are no guarantee for the future”.
but it doesn’t mean we don’t look at the past return right?
B is inaccurate because analyzing his historical performance does not mean you will be able to determine whether he will “consistently outperform over time”.
There is no way to determine this, unless you have a crystal ball.
For ex. he might have outperformed every year for the past 40 years, but it does not mean he will outperform again next year
Exactly. You do look at past returns in evaluating managers, that’s normal. If a manager didn’t beat his benchmark over a long time horizon at all, the chances are very slim he will be able to beat it in the future. It’s more like a negative screen.
i finally understand! thank you guys!!