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Consider the following information regarding the performance of a money manager in a recent month
Consider the following information regarding the performance of a money manager in a recent month. The table represents 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 indices in column 4. Actual Weight Equity Bonds Cash Actual Return 2.2% 1.1 0.7 0.4 0.2 0.4 Benchmark Weight 0.5 0.2 0.3 Index Return 2.7% (5&P 500) 1.5 (Barclay's Aggregate) 0.8
Expert Solution
a-1) Manager's return
Expected return = (.5*2.7%) + (.2*1.5%) + (.3*.8%)
=1.35%+.3%+.24% = 1.89%
Actual return = (.4*2.2%) + (.2*1.1%) +(.4*.7%) = .88%+.22%+.28% = 1.38%
Manager's return = 1.38%
a-2) Overperformance or Underperformannce
Expected return- Actual return
=1.89% - 1.38% =.51%
Under performance = .51%
b) Security selection
| Market | Differential Return within market (Manger-index) | Manager's portfolio Weight | Contribution to performence |
| Equity | -0.5% | .4 | -0.2% |
| Bonds | -0.4% | .2 | -0.08% |
| Cash | -0.1% | .4 | -0.04% |
| Total | -0.32% |
Contribution to Security selection = -0.32%
C) Asset allocation
| Market | Excesse Weights (manager - Benchmark) | Index return | Contribution to performence |
| Equity | -0.1 | 2.7% | -.27% |
| Bonds | 0 | 1.5% | 0% |
| Cash | 0.1 | .8% | .08% |
| Total | -.19% |
Contribution to Asset allocation = -0.19%
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