Alexandra Jones, a senior adviser at Federalist Investors (FI), meets with Erin Bragg, a junior analyst. Bragg just completed a monthly performance evaluation for an FI fixed-income manager. Bragg’s report addresses the three primary components of performance evaluation: measurement, attribution, and appraisal. Jones asks Bragg to describe an effective attribution process. Bragg responds as follows:
| Response 1:Performance attribution draws conclusions regarding the quality of a portfolio manager’s investment decisions. |
|---|
| Response 2: |
Bragg notes that the fixed-income portfolio manager has strong views about the effects of macroeconomic factors on credit markets and follows a top-down investment process.
Jones reviews the monthly performance attribution and asks Bragg whether any risk-adjusted historical performance indicators are available. Bragg produces the following data:
Exhibit 1
10-Year Trailing Risk-Adjusted Performance
| Average annual return | 8.20% |
|---|---|
| Minimum acceptable return (MAR) | 5.00% |
| Sharpe ratio | 0.95 |
| Sortino ratio | 0.87 |
| Upside capture | 0.66 |
| Downside capture | 0.50 |
| Maximum drawdown | –24.00% |
| Drawdown duration | 4 months |
Q. The most appropriate risk attribution approach for the fixed-income manager is to:
A. decompose historical returns into a top-down factor framework.
B. evaluate the marginal contribution to total risk for each position.
C. attribute tracking risk to relative allocation and selection decisions.
C is correct. The portfolio is managed against a benchmark, which indicates a relative-risk type of risk attribution analysis. For a top-down investment approach, the analysis should attribute tracking risk to allocation and selection decisions relative to the benchmark.
How is C the right answer over A? Did the question say that the FI fund was managed to a benchmark?
Many thanks in advance.