Question

Primo Management Co. is looking at how best to evaluate the performance of its managers. Primo has been hearing more and more about benchmark portfolios and is interested in trying this approach. As such, the company hired Sally Jones, CFA, as a consultant to educate the managers on the best methods for constructing a benchmark portfolio, how best to choose a benchmark, whether the style of the fund under management matters, and what they should do with their global funds in terms of benchmarking.

For the sake of discussion, Jones put together some comparative two-year performance numbers that relate to Primo’s current domestic funds under management and a potential benchmark.

	Weight							Return
Style Category	Primo			Benchmark				Primo			Benchmark
Large-cap growth		.60			.50				17	%		16	%
Mid-cap growth		.15			.40				24			26
Small-cap growth		.25			.10				20			18

As part of her analysis, Jones also takes a look at one of Primo’s global funds. In this particular portfolio, Primo is invested 75% in Dutch stocks and 25% in British stocks. The benchmark invested 50% in each—Dutch and British stocks. On average, the British stocks outperformed the Dutch stocks. The euro appreciated 6% versus the U.S. dollar over the holding period, while the pound depreciated 2% versus the dollar. In terms of the local return, Primo outperformed the benchmark with the Dutch investments but underperformed the index with respect to the British stocks.

What is the within-sector selection effect for each individual sector? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 1 decimal place.)

Style Category	Within-sector Selection Effect
Large-cap growth		%
Mid-cap growth		%
Small-cap growth		%
Total effect		%

Answer 1

Within Sector Selection Effect for each individual sector = Benchmark Weight of each sector * (Primo Return of sector - Benchmark Return of sector)

Large Cap Effect = 0.50 * (17% - 16%) = 0.5%

Mid Cap Effect = 0.40 * (24% - 26%) = -0.80%

Small Cap Effect = 0.10 * (20% - 18%) = 0.20%  

Total Effect -0.10%

Therefore the within sector selection effect = -0.10% (Primo underperformed the Benchmark)

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