Relative Comparisons
Chapters in this video
- 0:00 The five traps in evaluating pooled investments
- 0:57 Matching the benchmark to asset class and style
- 2:27 Manager tenure and the ghost of past performance
- 3:40 Morningstar boxes, style drift, and policy changes
- 5:16 Market indexes: 30 blue chips and the price-weighted DJIA
- 6:42 Rapid-fire exam recap
What this video covers
- Why a bond fund compared to the Standard and Poor's (S&P) 500 is an invalid benchmark pairing, and which index (Bloomberg Aggregate, Morgan Stanley Capital International Europe Australasia Far East (MSCI EAFE), or other) belongs with each asset class
- What alpha truly measures: the value a manager adds or subtracts only when measured against an appropriate benchmark
- Why manager tenure matters, and how past performance becomes non-attributable when the portfolio manager who generated it departs
- The difference between a fundamental policy change (requires shareholder vote) and style drift (unapproved deviation), and why both make prior performance data unreliable
- How Morningstar-style boxes classify funds by size (large, mid, small) and style (value, blend, growth), and why drifting outside the assigned box triggers due diligence
- The unique characteristics of the Dow Jones Industrial Average (DJIA): 30 stocks, price-weighted, not market-cap weighted like most indexes
- Why comparing an actively managed fund's net return to an unmanaged index without fee adjustment is misleading on the exam
Read the full lesson, free
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