The following table shows the rate of return and weight for three sectors that comprise a portfolio and its benchmark

Finance Aug 12, 2020

The following table shows the rate of return and weight for three sectors that comprise a portfolio and its benchmark. What is the allocation effect on sector A based on the Brinson- Hood-Beebower (BHB) Model? Sector Portfolio Return Benchmark Portfolio Weight Benchmark Weight Return A 40% 25% 0.25% 1.35% B 25% 45% 1.25% 0.15% C 35% 30% 2.15% 3.00% A. 0.2025% B.-0.275% C. -0.165% D. 0.645%

Expert Solution

The Correct answer is Option (A) 0.2025%

Working:-

As per BHB Model ,

(Portfolio Weight - Benchmark Weight) * Benchmark Return

(40%-25%) * 1.35%

= 15%*1.35%

=0.2025%

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