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) Retn (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?
[04 Marks]
[Total: 20 Marks]

Answer 1

(a)

Allocation contribution	Portfolio	Benchmark
Energy	9%	5%
	(18*50%)	(10*50%)
Health care	-0.90%	-0.40%
	(-3*30%)	(-2*20%)
Financials	2%	3.60%
	(10*20%)	(12*30%)
(b)
Allocation contribution	Performance
Energy	4%
	( 9% - 5%)
Health care	-0.50%
	( -0.9% - ( -0.4%) )
Financials	-1.60%
	( 2% - 3.6%)
(c)
Allocation contribution	Portfolio	Benchmark
Energy	9%	5%
	(18*50%)	(10*50%)
Health care	-0.90%	-0.40%
	(-3*30%)	(-2*20%)
Financials	2%	3.60%
	(10*20%)	(12*30%)
Overall performance	10.10%	8.20%

The performance of the portfolio on overall basis is better than benchmark as the overall performance of porfolio is 10.10% which is higher than the overall performance of becnch i.e 8.2%.

(d) The main causes for the differences

1. Difference in the sector allocation of the weights.
2. Difference in the performance represented by the returns .