Validity of a Returns-Based Benchmark

[jbct91]

Are returns based benchmarks valid?

If so, how/why?

If not, how/why according to SAMURAI?

Thanks!

[Onward]

No because they cannot be specified in advance and they are not reflective of how portfolio managers select securities

[analystdude]

Not investable, but why not specified in advance? You would specify that you want X return, no?

[JayWill]

Actually, they are both investable, and can be specified in advance. All they require is a manager’s past returns and the returns on a selection of style indexes over the same period. The negatives are that the benchmark may contain securities and sectors that a manager isn’t willing to hold and it requires many months of historical data which can be impacted by style drift.

[jbct91]

Good stuff JayWill

[Onward]

how are they specified in advance if they are return based? How can one know what the return profile of different asset classes will be ex ante? you’re implicitly assuming no regime change and extrapolating on past returns.

[Onward]

hmmm just looked at it in the book and it does not mention specificity as an issue, so JayWill is correct. I am just trying to wrap my head around how ex ante/historical returns are a good way to construct a benchmark

[JayWill]

@Onward

hmmm just looked at it in the book and it does not mention specificity as an issue, so JayWill is correct. I am just trying to wrap my head around how ex ante/historical returns are a good way to construct a benchmark

You’d probably need to dig up a paper by Bill Sharpe since I think he came up with this. One thing is clear though, the guy has a thing for investment style.

I believe the idea here Onward is to use past returns to determine a manager’s average style weightings over a period of time, and build a benchmark that mimics those weightings. This seems to relate closely with returns based style analysis.

[JeffO15]

I think median manager was the bench that couldn’t be specified in advance.

[Onward]

@JayWill

@Onward

hmmm just looked at it in the book and it does not mention specificity as an issue, so JayWill is correct. I am just trying to wrap my head around how ex ante/historical returns are a good way to construct a benchmark

You’d probably need to dig up a paper by Bill Sharpe since I think he came up with this. One thing is clear though, the guy has a thing for investment style.

I believe the idea here Onward is to use past returns to determine a manager’s average style weightings over a period of time, and build a benchmark that mimics those weightings. This seems to relate closely with returns based style analysis.

Awesome, thank you for that insight JayWill!!

[JayWill]

@Onward

@JayWill

@Onward

hmmm just looked at it in the book and it does not mention specificity as an issue, so JayWill is correct. I am just trying to wrap my head around how ex ante/historical returns are a good way to construct a benchmark

You’d probably need to dig up a paper by Bill Sharpe since I think he came up with this. One thing is clear though, the guy has a thing for investment style.

I believe the idea here Onward is to use past returns to determine a manager’s average style weightings over a period of time, and build a benchmark that mimics those weightings. This seems to relate closely with returns based style analysis.

Awesome, thank you for that insight JayWill!!

Hey I just throw thoughts out there sometimes and hope I’m on to something. I have a strong feeling that on results day, your matrix will look better than mine. But you’re welcome. What I enjoy about this forum that it keeps us thinking about different parts of the curriculum, and is probably why candidates who frequent this forum likely have a higher pass rate than those who don’t.

[Onward]

@JayWill

@Onward

@JayWill

@Onward

hmmm just looked at it in the book and it does not mention specificity as an issue, so JayWill is correct. I am just trying to wrap my head around how ex ante/historical returns are a good way to construct a benchmark

You’d probably need to dig up a paper by Bill Sharpe since I think he came up with this. One thing is clear though, the guy has a thing for investment style.

I believe the idea here Onward is to use past returns to determine a manager’s average style weightings over a period of time, and build a benchmark that mimics those weightings. This seems to relate closely with returns based style analysis.

Awesome, thank you for that insight JayWill!!

Hey I just throw thoughts out there sometimes and hope I’m on to something. I have a strong feeling that on results day, your matrix will look better than mine. But you’re welcome. What I enjoy about this forum that it keeps us thinking about different parts of the curriculum, and is probably why candidates who frequent this forum likely have a higher pass rate than those who don’t.

Haha I am positive that you’ll do well, im sure we’re all in the burn out phase but 12 days to go almost there and potentially no more CFA exams *fingers crossed for the both of us*

And I agree, i think active AF participants are by definition highly invested in this learning process. I like it