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.

	Actual Return		Actual Weight	Benchmark Weight	Index Return
Equity	2	%	0.5	0.4	2.5% (S&P 500)
Bonds	1.8		0.3	0.4	2 (Barclay’s Aggregate)
Cash	0.6		0.2	0.2	0.7

a-1. What was the manager’s return in the month?

a-2. What was her overperformance or underperformance?

b. What was the contribution of security selection to relative performance?

c. What was the contribution of asset allocation to relative performance?

Answer 1

a. 1) ANSWER

	Actual return (%)	Actual weight	Managers return = ( Actual return x Actual weight)
Equity	2	0.5	1%
Bond	1.8	0.3	0.54%
Cash	0.6	0.2	0.12%
	TOTAL	1.66 %

Therefore, the managers return in the month = 1.66 %

a.2) ANSWER:

	Benchmark weight	Index return (%)	Bogey return (Benchmark weight x Index return )
Equity	0.4	2.5	1%
Bond	0.4	2	0.8%
Cash	0.2	0.7	0.14%
	TOTAL	1.94 %

Managers return = 1.66 %

Bogey return = 1.94%

Managers return – Bogey return = - 0.28 %

Since the bogey return is more than mangers return, it is underperformed.

Hence, The Underperformance = - 0.28 %.

b. Answer:-

	Differential Return ( Actual Return – Index Return)	Actual Weight	Contribution to Performance
Equity	- 0.5	0.5	-0.25%
Bond	-0.2	0.3	-0.06 %
Cash	-0.1	0.2	-0.02 %
	TOTAL	-0.33%

Contribution of security selection to relative performance = -0.33%

c. Answer :

	Excess Weight ( Actual Weight – Benchmark Weight)	Index return (%)	Contribution to Performance
Equity	0.1	2.5	0.25%
Bond	-0.1	2	-0.2 %
Cash	0	0.7	0
	TOTAL	0.05%

The contribution of asset allocation to relative performance = 0.05%