Question

Question

You are provided with the following data for a three-sector LUSE portfolio (P) and the benchmark (B):

 

Sector              Weight (P)        Weight (B)        Return (P)         Return (B)

Energy               50%                 50%                  18%                  10%

Health Care       30%                  20%                  −3%                 −2%

Financials         20%                  30%                  10%                  12%

 

Required:

a)   Determine the allocation contribution of the following:

                     i.        Energy sector

                    ii.        Health sector

                  iii.        Financials sector

[06 Marks]

b)  What was the fund managers’ contribution to the portfolio performance due to security selection for the:

                     i.        Energy sector

                    ii.        Health sector

                  iii.        Financials sector

[06 Marks]

c)   How did the portfolio perform in comparison to the benchmark?

[04 Marks]

d)  What were the main causes of the difference in performance between the two?

Answer 1

			Weight				Return
Sector		P		B		P		B
Energy		50%		50%		18%		10%
Health Care		30%		20%		-3%		-2%
Financials		20%		30%		10%		12%
a) Determine the allocation contribution to the following:
	Sector		Allocation Contribution		Product of Excess Weight and Benchmark Return
	Energy		0.00%	(C3-E3)*I3
	Health Care		-0.20%	(C4-E4)*I4
	Financials		-1.20%	(C5-E5)*I5
b) What was the fund managers' contribution to the portfolio performance due to the security selection
	Sector		Security Selection Contribution		Product of Portfolio Weight and Excess Returns
	Energy		4.00%	C3*(G3-I3)
	Health Care		-0.30%	C4*(G4-I4)
	Financials		-0.40%	C5*(G5-I5)
c) How did the portfolio perform in comparrison to the benchmark?
Total Allocation Effect			-1.40%	SUM(D11:D13)
Total Security Selection Effect			3.30%	SUM(D18:D20)
Total			1.90%	SUM(D24:D25)
	The portfolio performed 1.90% higher than the benchmark.
d) What were the main causes of the difference in performance between the two?
	The main cause for the LUSE portfolio's higher performance was the manager's superior security selection in the energy sector (4.00%).

(Answers are highlighted in green; Excel formulas are provided to the right of calculations)