NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A registered investment adviser is evaluating a client's portfolio performance. The client's portfolio returned 12% over the past year, while the S&P 500 returned 10% and a custom benchmark (60% S&P 500, 40% Bloomberg U.S. Aggregate Bond Index) returned 9%. The client's risk tolerance is moderate. What does this indicate about the adviser's performance?
- AThe adviser underperformed the market but outperformed the custom benchmark.
- BThe adviser's performance cannot be accurately assessed without knowing the portfolio's risk level.
- CThe adviser outperformed both the market and the custom benchmark.
- DThe adviser underperformed both the market and the custom benchmark.
Show answer & explanationAnswer & explanation
Correct answer: C. The adviser outperformed both the market and the custom benchmark.
The client's portfolio returned 12%. The S&P 500, representing the broad market, returned 10%. The custom benchmark, tailored to the client's moderate risk, returned 9%. Since 12% > 10% and 12% > 9%, the adviser outperformed both.
Why the other options are wrong
- A. Incorrect; 12% outperformed 10%.
- B. While risk level is crucial for a complete assessment, the question specifically asks about performance relative to given benchmarks, which can be directly compared by return.
- D. Incorrect; 12% outperformed both benchmarks.
Performance Measurement
The process of evaluating the investment returns of a portfolio or asset manager against predetermined benchmarks over a specific period.
- Compares portfolio returns to relevant market indices or custom benchmarks.
- Helps assess the effectiveness of an investment strategy.
- Should consider risk-adjusted returns, not just absolute returns.
Memory trick: Compare the portfolio's climb to the market's and custom's stride.