Question

Consider 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		2.0%			0.70			0.60		2.5%		(S&P 500)
Bonds		1.0			0.20			0.30		1.2		(Aggregate Bond Index)
Cash		0.5			0.10			0.10		0.5

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.)

(Underperformance or Overperformance)_______ %

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

a-1). Actual = (0.70 x 0.02) + (0.20 x 0.01) + (0.10 x 0.005) = 0.0165, or 1.65%

Bogey = (0.60 x 0.025) + (0.30 x 0.012) + (0.10 x 0.005) = 0.0191, or 1.91%

a-2). Underperformance = 0.0191 – 0.0165 = 0.0026, or 0.26%

b).

Market	(1) Portfolio Performance	(2) Index Performance	(3) Excess Performance	(4) Manager's Portfolio Weight	(5) = (3) x (4) Contribution
Equity	2.0%	2.5%	-0.5%	0.70	-0.35%
Bonds	1.0%	1.2%	-0.2%	0.20	-0.04%
Cash	0.5%	0.5%	0%	0.10	0.00%
				Total	-0.39%

c).

Market	(1) Actual Weight	(2) Benchmark Weight	(3) Excess Weight	(4) Index Return	(5)=(3) x (4) Contribution
Equity	0.70	0.60	0.10	2.5%	0.25%
Bonds	0.20	0.30	-0.10	1.2%	-0.12%
Cash	0.10	0.10	0	0.5%	0%
				Total	0.13%