CIPM Exam 2023 with 100% correct answers

What is simplest way to decompose active return piece of a portfolio return? 1.)Allocation Effect: holding diff amounts of same securities as bench (over or under weighting compared to bench) (thereby Q held is the sources of difference) 2.) Security Selection Effect: holding diff securities than benchmark (thereby returns are the sources of difference) Decompose an actively managed mutual fund return P =M + A + S A: Active return = P- Benchmark (holding diff. weightsof same securities (alloc), or entirely diff securities than Bench (sec selec)) S:Style = Benchmark - Mrkt Index * Keep in mind: Depending on the R^2, the portfolio's return is largely derived from the passive portf. portion. Active mngmt adds little additional.* Equity versus FI attribution Equity: Focuses only on decomposing excess return FI: Focuses on decomposing total return. Total Return = Excess Return + Return due to taking on Systemic Risk. Systemic return drivers: Interest rate management effect: How well mngr prepares for parallel shifts in gov yield curve as well as changes in slope of yield curve (non parallel shift). Excess return drivers: Allocation effect: holding diff amounts of same securities as bench (over or under weighting compared to bench) (thereby Q held is the sources of difference) Security Selection: holding diff securities than benchmark (thereby returns are the sources of difference) You are a plan sponsor trying to decide btw 2 Equity Fund PMs. The 2 PMs have similar style and returns. However, the firm PM,Alex, keeps cash level , at 1% of assets. Zebra keeps much more cash in portfolio, 10% of assets. Contrast Alex and Zebra in terms of cash level relative to overall fund return. Are there times when higher or lower cash levels could be beneficial to an equity portfolio? In general terms, equity will earn higher returns than cash on average over the long term. However there are periods of declining equity performance when cash may outperfrom equities. In the case of Alex and Zebra, Alex would be preferable over Zebra during most periods when equities are outperforming cash. During times when equities are declining, it may be preferable to have more cash. Unfortunately, it is extremely difficult to forecase ahead of time when these periods of declining equity performance will occur.