Question

In a particular year, Wiseguys Mutual Fund earned a return of 15% by making the following investments in the following asset classes

Asset Class	Weight	Return
Bonds Stocks	10% 90%	6% 16%

           The return on a benchmark portfolio was 11%, calculated as follows:

Asset Class	Weight	Return
Bonds (Lehman Index) Stocks (S&P 500 index)	40% 60%	5% 15%

The contribution of asset allocation across markets to the total excess return was

	A.	5%
	B.	4%
	C.	3%
	D.	1%

Answer 1

Weight of Bonds (Wb)= 10%

Weight of Benchmark for Bonds (Wbb) = 40%

Weight of stocks (Ws) = 90%

Weight of benchmark for stocks (Wbs) = 60%

Benchmaer return for Bonds (Rb) = 5%

Benchmark return for stocks (Rs) =15%

The contribution of asset allocation across markets to the total excess return

Using the above information:

(Wb -Wbb) * Rb + (Ws -Wbs) * Rs

= (0.10-0.4)*0.05 + (0.90-0.60)*0.15

= 0.03 or 3%

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