Free CFA Level III: Portfolio Management Performance Measurement Practice Questions

C is correct.

The appraisal ratio is calculated as the portfolio's alpha (the return earned beyond what is explained by systematic risk exposure) divided by the portfolio's unsystematic (residual or idiosyncratic) risk. It measures the manager's ability to generate abnormal returns per unit of diversifiable risk taken.

A is correct. The BHB allocation effect is $\sum (w_p - w_b) \times R_b$. Technology: $(0.35 - 0.28)(12\%) = 0.84\%$. Financials: $(0.20 - 0.25)(8\%) = -0.40\%$. Healthcare: $(0.30 - 0.22)(7\%) = 0.56\%$. Energy: $(0.15 - 0.25)(2\%) = -0.20\%$. Total $= 0.84 - 0.40 + 0.56 - 0.20 = 0.80\%$.

B is correct. Skill relative to the manager's own style is measured by the true active return, the portfolio's return in excess of the normal portfolio, divided by true active risk:
$$\text{True active return}=9.60\%-8.00\%=1.60\%$$
$$\text{True information ratio}=\frac{1.60\%}{3.20\%}=0.50$$
The remaining components confirm the decomposition. Misfit active return is $8.00\%-7.20\%=0.80\%$, so total active return against the investor benchmark is $1.60\%+0.80\%=2.40\%$, consistent with Exhibit 2. Total active risk is
$$\sqrt{(3.20\%)^2+(2.40\%)^2}=\sqrt{10.24+5.76}=4.00\%$$
which matches the reported figure. Because the quality-growth style outperformed the broad index over the period, the manager's record against the investor benchmark flatters the stock-selection component, and $0.50$ is the cleaner read on skill.