Consider the following information regarding the performance of a money manager in a recent month. The...

Free

90.2K

Verified Solution

Question

Finance

Consider the following information regarding the performance ofa money manager in a recent month. The table represents the actualreturn of each sector of the manager’s portfolio in column 1, thefraction of the portfolio allocated to each sector in column 2, thebenchmark or neutral sector allocations in column 3, and thereturns of sector indices in column 4.
Actual
Return
Actual Weight
Benchmark
Weight
Index Return
Equity
2%
0.7
0.6
2.5%
(S&P
500)
Bonds
1
0.2
0.3
1.2
(Salomon
Index)
Cash
0.5
0.1
0.1
0.5
a.         What was themanager's return for the month? What was her value-addedperformance for the month?
b.         What was thecontribution of asset allocation to relative performance?
c.         What was thecontribution of security selection to relative performance?

Answer & Explanation Solved by verified expert

3.6 Ratings (268 Votes)

Part a:
Manager's return for the month= (Actual return on equity)*(Actual weight of equity)+(Actual return on bond)*(Actual weight of debt)+(Actual return on cash)*(Actual weight of cash)
=2%*0.7+1%*0.2+0.5%*0.1=1.65%

Benchmark (index) return=2.5%*0.6+1.2%*0.3+0.5%*0.1=1.91%
Manger's value added (under performance)=1.65%-1.91%=-0.26%

Part b:

Equity =(Equity portfolio wt- Benchmark weight)* Benchmark return =(0.7-0.6)*2.5%=0.25%
Bond = (Bond portfolio wt- Benchmark weight)* Benchmark return =(0.2-0.3)*1.2%=-0.12%
Cash = (Cash portfolio wt- Benchmark weight)* Benchmark return =(0.1-0.1)*0.5=0

Contribution of asset selection = 0.25%-0.12%+0=0.13%

Part c:

Equity = (Equity portfolio return-Benchmark return)*Actual weight = (2%-2.5%)*0.7=-0.35%
Bond = (Bond portfolio return-Benchmark return)*Actual weight = (1%-1.2%)*0.2=-0.04%
Cash = (Cash portfolio return-Benchmark return)*Actual weight = (0.5%-0.5%)*0.1=0

Contribution of security selection = -0.35%-0.04%+0=-0.39%

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

	Actual Return	Actual Weight	Benchmark Weight	Index Return
Equity	2%	0.7	0.6	2.5%	(S&P 500)
Bonds	1	0.2	0.3	1.2	(Salomon Index)
Cash	0.5	0.1	0.1	0.5