Level I Verification: Portfolio Returns Calculation Methodology

Explanation

Portfolio returns must be calculated according to a time-weighted return methodology with a minimum of quarterly valuation and accrual of income for fixed-income securities.

Level I verification requires independent attestation that portfolio returns are calculated according to a(n) asset-weighted return methodology.

Explanation:

The question is referring to the verification process for portfolio returns calculation at Level I of the CFA® (Chartered Financial Analyst) exam. This verification process ensures that the returns are calculated accurately and in accordance with industry standards.

Portfolio returns can be calculated using different methodologies, depending on how the returns of individual assets are weighted. The weighted return methodology considers the weights or proportions of different assets within the portfolio when calculating the overall return.

The question specifically mentions an "asset-weighted return methodology," which means that the returns of each asset in the portfolio are weighted based on their respective proportions or values within the portfolio. This methodology gives more weight to assets with higher values or proportions in the portfolio and less weight to assets with lower values or proportions.

The other options provided in the question (size, price, time, and risk) do not accurately describe the methodology used to calculate portfolio returns.

• Size: The size of an asset refers to its market capitalization or the total value of its outstanding shares. However, size alone does not determine the weighting methodology used for calculating portfolio returns.
• Price: Price refers to the individual prices of assets. While prices can influence portfolio returns, they are not the basis for the weighting methodology used in return calculations.
• Time: Time is not directly related to the weighting methodology for calculating portfolio returns. Time may be considered when calculating investment performance over specific periods, but it does not determine the weighting methodology.
• Risk: Risk is an important factor to consider in portfolio management, but it does not determine the weighting methodology for calculating returns. Risk may be incorporated separately through risk-adjusted return measures.

Therefore, the correct answer is E. asset-weighted return methodology, as it accurately describes the approach used to calculate portfolio returns at Level I verification.