I got this right, but after reviewing their answer seems a bit sloppy to me. Since “other management effects” contains not only sector/quality effects but also bond selectivity and transaction costs, wouldn’t the better answer be “cannot determine” since in theory the transaction costs and bond selectivity could have been positive and the sector/quality negative?
Also, i thought “transaction costs” were part of the trading return, which is already given?
They gave the transaction costs separately in the exhibit, so wouldn’t the 0.32% directly be due to the sector/quality selection - which is issue selection…
They did not provide transaction costs separately, they did provide trading costs separately, i thought the two were the same… thats the second part of my question above…
Even if they are the same, they make it seem like they aren’t because as i mentioned above, again, they flat out say that all 3 of the components i mentioned above are within “other mgmt effects”. Sector/Quality is not the same as issue selection, one is a sector, one is a bond within a sector.
Other Mgmt per the book’s exhibit - contains Sector/Quality, Bond Selectivity and Transaction Costs.
I agree with you though - that Bond Selectivity could have had a positive effect while the Sector Quality Selection might have had a negative effect - but since the split is not present - we cannot really say what is the real impact.
In the exhibit in the book - they also separate the Trading Activity Return and the Transaction Costs. But they do not specify what comprises the individual components there in.
Yah, another shitty question by the CFAI doofus’s.
While I’m on this tangent, question 8.)C appears to be a botch as well. They calculate the return on the forward contract using a spot rate. The formula in the book (Schweser at least) is (Ft-F0)V0 / V0S0 for the forward contract portion of the hedged portfolio return. Yet they solve it in this example as St-F0 in the numerator rather than Ft-F0 (they give us the spot at time T but not the forward, so they are implicitly assuming the two are equal).
For 8C) they mention that the beginning value Spot = Forward. Maybe the same assumption is made for the ending value as well.
Maybe, but they would have to say that.
LOS : asks us to evaluate, explain & interpret
If evaluate - does this mean that we may also required to do the performance attribution (calculation) decomposition in 1) Int rate effect 2) Int mgmt effect 3) Other mgmt effect 4) Trading activity return
If such is the case then we may require to know what comprises in Other mgmt effect’s Txn cost & Trading activity return
But i think the pattern of ques is always like interpreting results & comparing it with the stated objectives only so far.
markCFAIL , I don’t understand your logic of calculating the return on the forward contract .
It seems to me that the return on the forward contract that is just maturing should be (St-F0)/F0 .
Ft is irrelevant at time T . ( contract maturity ) . Ft would represent a new forward price , but we’re talking about a committment that was made at time T0 for F0 price.
Ft would be just a new position that you take , i.e. a new contract
We’re calculating the return on a forward contract that is maturing just now , but it was struck at the rate of F0. Its current market price is St.
Can you explain a little more clearly , because I’m confused.