Question

Consider the following performance of an actively managed portfolio

	Actively managed portfolio		Benchmark portfolio
Component	Weight	Return	Weight	Return
Equity	0.7	7.00%	0.5	4.00%
Bonds	0.15	2.00%	0.25	1.80%
Cash	0.15	0.30%	0.25	0.30%

What is the attribution of excess return by asset allocation for this portfolio?

	A.	0.78%
	B.	0.59%
	C.	2.72%
	D.	None of the options.
	E.	2.13%

Answer 1

The correct answer is C.2.72 %

We need to calculate the excess return earned by the actively managed portfolio over benchmark portfolio.

Excess Return = Return from Actively managed portfolio - Return from Benchmark portfolio

Expected return = Weighted average of returns

= Weight allocated to equity * Return from equity + Weight allocated to Bonds * Return from bond + Weight allocated to cash * Return from cash

Expected return of Actively managed portfolio

= 0.7 * 7 + 0.15 * 2 + 0.15 * 0.30

= 4.9 + 0.3 + 0.045

= 5.245 %

Expected return of Benchmark portfolio

= 0.5 * 4 + 0.25 * 1.80 + 0.25 * 0.30

= 2 + 0.45 + 0.075

= 2.525 %

Therefore excess return

= 5.245% - 2.525%

= 2.72%