Question

onsider the following information regarding the performance of a money manager in a recent month. The table presents 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 indexes in column (4).

	(1) Actual Return			(2) Actual Weight			(3) Benchmark Weight			(4) Index Return
Equity		2.9%			0.50			0.40		3.7%		(S&P 500)
Bonds		2.0			0.20			0.30		2.6		(Aggregate Bond Index)
Cash		1.7			0.30			0.30		1.7

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

Manager’s return             %

a-2. What was her over or underperformance? (Input the value as positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.)

(Click to select)UnderperformanceOverperformance         %

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

Contribution of security selection             %

c. What was the contribution of asset allocation to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Contribution of asset allocation             %

Answer 1

1. a1)Expected Return in the month = return of equity* actual weight of equity+ return on bond/debt *actual weight of debt + return on cash * actual weight of cash =2.9%*0.5+2%*0.2+1.7%*0.3 = 2.36%

a2) Benchmark return = 3.7%*0.4+2.6%*0.3+1.7%*0.3 = 2.77%
So the mangers under performance =2.36%-2.77% =-0.41%

b)Contribution of security selection
Equity = (Portfolio return-Benchmark return)*Actual weight =(2.9%-3.7%)* 0.5=-0.4%
Bond = (Portfolio return-Benchmark return)*Actual weight =(2%-2.6%)*0.2=-0.12%
Cash = (Portfolio return-Benchmark return)*Actual weight =(1.7%-1.7%)*0.3=0%
Contribution of security selection =-0.4%-0.12%+0%=-0.16%

c) Contribution of asset selection
Equity =(Portfolio wt- Benchmark wt)* Benchmark return=(0.5-0.4)*3.7%=0.37%
Bond = (Portfolio wt- Benchmark wt)* Benchmark return=(0.2-0.3)*2.6%= -0.26%
Cash = (Portfolio wt- Benchmark wt)* Benchmark return=(0.3-0.3)*1.7%=0%

Contribution of asset selection =0.37%-0.26% = 0.11%

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