Question

In: Accounting

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

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:

  1. Determine the allocation contribution of the following:
    1. Energy sector
    2. Health sector
    3. Financials sector

[06 Marks]

  1. What was the fund managers’ contribution to the portfolio performance due to security selection for the:
    1. Energy sector
    2. Health sector
    3. Financials sector

[06 Marks]

  1. How did the portfolio perform in comparison to the benchmark?

[04 Marks]

  1. What were the main causes of the difference in performance between the two?

                                                                        [04 Marks]

                                                                [Total: 20 Marks]

Solutions

Expert Solution

Answer :

For the following set of portfolio and index data

Sector Weight P Weight B Return P Return B
Energy 0.5 0.5 18.00% 10.00%
Healthcare 0.3 0.2 -3.00% -2.00%
Financials 0.2 0.3 10.00% 12.00%

(a).

The sectoral allocation contribution is found for the both the portfolio P and the index beachmark B as follows

Allocation contribution Portfolio Beachmark
Energy 9.00% 5.00%
Healthcare -0.90% -0.40%
Financials 2.00% 3.60%

(b).

The performance of the fund manager to derive over and above benchmark return in the portfolio is calculated as follows

Allocation contribution Performance
Energy 4.00%
Healthcare -0.50%
Financials -1.60%

(c)

Allocation contribution Portfolio Benchmark
Energy 9.00% 5.00%
Healthcare -0.90% -0.40%
Financials 2.00% 3.60%
Overall performance 10.10% 8.20%

While looking at the sectoral performance the portfolio is underperforming in the healthcare and the Financial segment. On the overall basis the portfolio has a return of 10.10% which is higher than the benchmark return of 8.20% for the index.Hence the performance of the portfolio on an overall basis is berrer than of the benchmark.

(d).

The main causes for the differences

  1. The differences in the sectoral allocation in the weights
  2. The higher returns achived in the energy sector allocated stocks from the performance of the fund managers
  3. The proper diversification of the risk of the underperforming sectors
  4. Overall higher portfolio returns compared to the benchmark.

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