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	2.6	%	0.4	0.6	3.1% (S&P 500)
Bonds	1.5		0.2	0.1	1.7 (Barclay’s Aggregate)
Cash	0.7		0.4	0.3	0.8

a-1. What was the manager’s return in the month? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.)

a-2. What was her overperformance or underperformance? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.)

b. What was the contribution of security selection to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

c. What was the contribution of asset allocation to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

Answer 1

the manager’s return in the month= 0.4*2.6+0.2*1.5+0.4*0.7=1.62%

Benchmark return = 0.6*3.1+0.1*1.7+0.3*0.8=2.27%

therefore the manager underperformed by 1.62%-2.27%=0.65%

the contribution of security selection to relative performance= -0.5*0.4+-0.2*0.2+-0.1*0.4=-0.28%

(1) Fund return less index return     (2.6%-3.1%)

               (2) The actual weight of the managed portfolio

               (1*2) The contribution of asset class security selection to the portfolio

a)Contribution of Asset Allocation =-0.2*0.83+0.1*-0.57+0.1*-1.47=-0.37%

               (3) Weight of actively managed fund less benchmark weight (- is underweight)

               (4) Asset class return less total portfolio return (equity is 3.1-2.27 or .83%,        bond is 1.7-2.27=-.57)

               (3*4) Contribution of the asset class to the total portfolio