True active return

[hh]

I got burned by this a few times…just checking if I am crazy.
True active return is Rp - investor’s benchmark
Misfit active return is investor’s benchmark - normal portfolio
I thought that normal portfolio was the “correct” benchmark to use, but I got a few CFAI questions wrong using it to calculate true active return.
Is the above correct?

 

[dongjohnson]

I think you’ve got it backwards.
True active return = total active return - normal portfolio return
Misfit active return = normal portfolio return - investor’s benchmark return
The normal portfolio reflects securities the manager normally chooses for the portfolio. It’s the better benchmark for the mgr since it reflects the correct style. The investor’s benchmark is typically a broad-based benchmark that the investor (i.e. plan sponsor) chooses that does not reflect the manager’s style.

 

[sterling76]

Nope.
True active return = portfolio return - normal portfolio
Misfit active return = normal portfolio - benchmark
It’s as easy as that.

 

[hh]

That was what I thought - then I got a practice exam question - i think from the mock - wrong because they used the investor’s benchmark in the true active return and the normal as the misfit.
I hate level 3 right now.
FML

 

[hk]

True active return is manager performance - normal (His) BM performance, misfit active return is normal BM performance - investor’s (your) BM performance.
For example, you have a value investor. It wouldn’t be fair to compare his performance versus the S&P 500, because due to the nature of his investment style, he will more often than not deviate from the S&P 500 simply because of his value style. As another example, it is in fact possible that the manager outperforms the S&P 500 and you think that’s great at first. But in fact, he underperformed the value BM and his outperformance versus the S&P 500 came only from the fact that the particular market phase over which you compare returns favored the value style.
Just remember that every manager that follows a particular style has “2” benchmarks…

 

[lolly]

hh Wrote:
——————————————————-
> That was what I thought - then I got a practice
> exam question - i think from the mock - wrong
> because they used the investor’s benchmark in the
> true active return and the normal as the misfit.
>
> I hate level 3 right now.
>
> FML
hh – i have same question about CFAI mock exam answer to #23. They calc active return as manager return - investor benchmark return (not normal benchmark return).
is this errata, or can anyone explain why we’re not using ‘normal’ benchmark?