Connell then queries Twimbly on the merits of capture ratios and drawdowns in evaluating manager risk. Twimbly offers the following two opinions:
Opinion 1: Observing drawdowns is an excellent way to evaluate a manager’s operational due diligence procedures.
Opinion 2: The degree of a manager’s active share is the best way to assess the firm’s risk management policies.
- Which of Twimbly’s opinions regarding indicators of an asset manager’s approach to risk management is(are) least likely correct?
A. Opinion 1 only
B. Opinion 2 only
C. Opinion 1 and Opinion 2
Answer. B
LOS: Volume 5, Learning Module 4, Describe uses of the upside capture ratio, downside capture ratio, maximum drawdown, drawdown duration, and up/down capture in evaluating managers.
Twimbly’s observation in Opinion 2 is incorrect. Active share indicates the degree to which a manager’s portfolio weights differ from those of the benchmark constituents. It is not, in and of itself, a catch-all metric for a manager’s risk management policies; the assessment involves numerous factors.
Reference: 2024, Investment Manager Selection, L3, Volume 5, Learning Module 4, Section 5, Capture Ratios and Drawdowns in Manager Evaluation, pp. 279-283.
