Question

Consider the following information regarding the performance of a money manager in a recent month. The table represents the actual return of each sector of the manager's portfolio in column 1, the fraction of the portfolio allocated to each sector in column 2, the benchmark or neutral sector allocations in column 3, and the returns of sector indices in column 4 Benchmark Weight 0.4 Equity Bonds Cash Actual Return 2.25 1.2 0.5 Actual Weight 0.6 0.2 Index Return 2.76 (S&P 500) 1.5 (Barclay's Aggregate) 0.5 0.2 0.3 a-1. What was the manager's return in the month? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.) The manager's return in the month is a-2. What was her overperformance or underperformance? (Do not round Intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.) < Prev 5 of 6 !!! Next >

Answer 1

1. a1)Expected Return in the month = return of equity* actual weight of equity+ return on bond/debt *actual weight of debt + return on cash * actual weight of cash =2.2%*0.6+1.2%*0.2+0.5%*0.2 = 1.66%

a2) Benchmark return = 2.7%*0.4+1.5%*0.3+0.5%*0.3 = 1.68%
So the mangers underperformance =1.68%-1.66% =0.02%

b)Contribution of security selection
Equity = (Portfolio return-Benchmark return)*Actual weight =(2.2%-2.7%)* 0.6=-0.30%
Bond = (Portfolio return-Benchmark return)*Actual weight =(1.2%-1.5%)*0.2=-0.06%
Cash = (Portfolio return-Benchmark return)*Actual weight =(0.5%-0.5%)*0.2=0.00%
Contribution of security selection =-0.30%-0.06%-0.00%=-0.36%

c) Contribution of asset selection
Equity =(Portfolio wt- Benchmark wt)* Benchmark return=(0.6-0.4)*2.7%=0.54%
Bond = (Portfolio wt- Benchmark wt)* Benchmark return=(0.2-0.3)*1.5%= -0.15%
Cash = (Portfolio wt- Benchmark wt)* Benchmark return=(0.2-0.3)*0.5%=-0.05%

Contribution of asset selection =0.54%-0.15%-0.05% =0.34%