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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. Equity Bonds Actual Return 2.6% 1.6 0.6 Actual Weight 0.5 0.2 0.3 Benchmark Weight 0.4 0.2 0.4 Index Return 3.1% (S&P 500) 1.8 (Barclay's Aggregate) 0.7 1 points Cash a-1. What was the manager's return in the month? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.) eBook The manager's return in the month is Print ? References a-2. What was her overperformance or underperformance? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.) % b. What was the contribution of security selection to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.) Contribution of security selection
Expert Solution
a-1). Manager's Return in the month can be calculated as:
RManager = wE RE + wB RB + wC RC = (0.5)*(2.6%) + (0.2)*(1.6%) + (0.3)*(0.6%) = 1.80%
a-2). Benchmark Index Return can be calculated as:
RBenchmark = wE RE + wB RB + wC RC = (0.4)*(3.1%) + (0.2)*(1.8%) + (0.4)*(0.7%) = 1.88%
Since, RManager < RBenchmark , we can say that the manager underperformed the benchmark by [ = (1.88 - 1.80)] = 0.08%
b). Contribution of Security Selection to relative performance:
ContributionSS = (Actual Weight) * (Excess Performance)
ContributionSS = (0.5)*(2.6% - 3.1%) + (0.2)*(1.6% - 1.8%) + (0.3)*(0.6% - 0.7%)
ContributionSS = - 0.32%
c). Contribution of Asset Allocation to relative performance:
ContributionAA = (Excess Weight) * (Benchmark Return)
ContributionAA = (0.5 - 0.4)*(3.1%) + (0.2 - 0.2)*(1.8%) + (0.3 - 0.4)*(0.7%)
ContributionAA = 0.24%
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