A finished FIN-655 Topic 4 benchmark suitability review example, testing a manager's comparison index against the mandate, splitting a 3.2-point lead into style and skill and declining new money. Searches like "fin 655 topic 4 assignment example", "fin655 topic 4 sample" and "fin-655 topic 4 example" land here.
What a finished FIN-655 Topic 4 benchmark suitability review looks like
The finished review opens with the mandate letter signed three years earlier, which named a small-cap value index as the benchmark. Illustrative annualized figures follow: the manager returned 11.2 percent net of fees, the broad large-cap index 8.0 and the small-cap value index 10.9. Against the broad index the manager leads by 3.2 points with tracking error of 9.0, an information ratio near 0.36. Against the index the mandate named, the lead is 0.3 points with tracking error of 2.5, a ratio of 0.12. So 2.9 of the 3.2 points is the return of the style the committee chose to hire. A holdings check and a returns-based style regression confirm that the manager stayed small and cheap throughout. The peer universe median of 9.4 is set aside as neither investable nor free of survivorship bias.
How a FIN-655 Topic 4 example is structured
The review tests the benchmark before it reads any result. Its first section quotes the mandate letter's benchmark clause and the style the committee said it was hiring. A criteria section applies the properties associated with Jeffery Bailey and his coauthors: a valid benchmark is specified in advance, appropriate to the manager's style, investable, measurable and unambiguous, among others. Each candidate comparison, the broad index, the style index and the peer universe, is scored against those properties in a table. A decomposition section splits the 3.2-point lead into the style return, the style index minus the broad index, and the manager's active return over the style. The evidence section converts the 0.3 points into an information ratio and notes that three years at that ratio cannot be told apart from zero. The review closes by declining the proposed addition and stating the record that would justify one.
The benchmark the committee signed
Three years ago the mandate letter named a small-cap value index, so any other comparison changes the question after the answer is known.
Three candidates scored on the same properties
The broad index fails on appropriateness, the peer universe fails on investability and advance specification, and only the style index passes every test.
A 3.2-point lead split in two
Style supplies 2.9 points, the small-cap value index's lead over the broad market, and the manager's own contribution is the remaining 0.3.
Style confirmed from holdings and returns
Holdings show small, low-valuation companies throughout, and a returns-based style regression of the kind William Sharpe introduced points to the same index.
An information ratio too short to trust
At 0.12 over three years the manager's edge has a t-statistic near 0.2, so the record neither condemns the manager nor supports more money.
Where marks go in FIN-655 Topic 4
Reviews that accept the chair's comparison and debate only the size of the lead forfeit the most, since the benchmark was fixed in the mandate and a result measured against another index says nothing about the manager hired. Papers that switch benchmarks after seeing results destroy the one property that makes measurement honest. Crediting the manager with the style return pays for an exposure the committee chose and could hold through an index fund. A peer universe median used as the benchmark imports survivorship bias and a comparison no one could have bought. Reporting the information ratio without the length of record gives it an authority three years cannot carry. The last common gap is a review that ends on the analysis, since the committee asked a question, whether to add money, and needs it answered.
Get a FIN-655 Topic 4 example written to your instructions
Send the FIN-655 Topic 4 instructions and the rubric listed in your classroom, with the manager data or case your section provides. We write a custom example to them, with the mandate's benchmark quoted, candidate comparisons scored on valid-benchmark properties, the result split into style and active return and a decision on new money, in 24 to 48 hours. The first one is free.
FIN-655 Topic 4 questions, answered
What makes a benchmark valid?
It should be specified before the period it measures, appropriate to the manager's style, investable as an alternative, measurable often enough to track and unambiguous about what it holds. The benchmark should also reflect what the manager actually does, so that the manager could be held accountable to it. A broad index for a small-cap value manager fails on appropriateness, and a peer median fails on being specified in advance.
Why is a peer universe a weak benchmark?
Because it is not a portfolio anyone could hold. The median manager is known only after the period ends, the universe changes as funds close or merge, and funds that performed badly tend to drop out, which lifts the survivors' median over time. A universe can describe where a manager ranked, but it cannot serve as the passive alternative against which the committee judges what the manager added.
Does the review judge a real manager?
No. The endowment, the manager, the index returns and the tracking errors are illustrative, built to let the style return and the active return separate cleanly. Evaluating a real manager needs the actual mandate, audited returns, a longer record and holdings data, and a real hiring or funding decision belongs to the committee and its advisers. What the example shows is the benchmark discipline FIN-655 grades, as coursework only.