Subject 301, April 2004, Question 9: in calculating the quarterly performances of the benchmark fund the amounts invested in bonds and equities at the start of each quarter are based on the performance experienced in the previous quarter. By contrast Subject ST5, April 2010, Question 4: a similar question to above but this time the answer effectively assumes that the benchmark portfolio is rebalanced in line with the strategic allocation at the start of each quarter. Can anybody explain why these two questions use the two different approaches?
I think you wrote the wrong year or question number for the second question as April 2010 Q4 is not about performance attribution. Maybe you meant April 2010 Q6? Anyway, I think the reason is in Subject 301, April 2004, Q9 the question does not state at any point that the portfolio is rebalanced in line with the strategic benchmark. I suspect that the second question you refer to where the answer allows for rebalancing specifically states in the question that rebalancing occurs. For example in April 2010 Q6 the question states 'the portfolio is rebalanced at the end of the second quarter back to the strategic benchmark'. Most questions I've come across so far have only allowed for rebalancing when it has been explicitly stated in the question.
The questions are sometimes a bit fuzzy on this issue. My advice would be, if it states that the fund rebalances at specific time periods, then assume that the benchmark does the same. If the question gives you nothing to go on, then state an assumption really clearly and go with it. The examiners should give marks for a correct solution given any reasonable assumptions. (PS I think the reason for the incorrect question number is because it seems to be incorrect in our revision booklets. Will correct this next update!)
