As port of her analysis, Jones also takes a look at one of Primo’s global funds.
ID: 2750271 • Letter: A
Question
As port of her analysis, Jones also takes a look at one of Primo’s global funds. In this particular portfolio, Primo is invested 75% in Dutch stocks and 25% in British stocks. The benchmark invested 50% in each—Dutch and British stocks. On average, the British stocks outperformed the Dutch stocks. The euro appreciated 6% versus the U.S. dollar over the holding period, while the pound depreciated 2% versus the dollar. In terms of the local return, Primo outperformed the benchmark with the Dutch investments but underperformed the index with respect to the British stocks.
Calculate the amount by which the Primo portfolio out- (or under-) performed the market over the period.(Input the value as positive value. Do not round intermediate calculations. Round your answer to 1 decimal place.)
Calculate the contribution to performance of the pure sector allocation. (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 1 decimal place.)
Calculate the contribution to performance of the security selection decisions. (Do not round intermediate calculations. Round your answer to 1 decimal place.)
As port of her analysis, Jones also takes a look at one of Primo’s global funds. In this particular portfolio, Primo is invested 75% in Dutch stocks and 25% in British stocks. The benchmark invested 50% in each—Dutch and British stocks. On average, the British stocks outperformed the Dutch stocks. The euro appreciated 6% versus the U.S. dollar over the holding period, while the pound depreciated 2% versus the dollar. In terms of the local return, Primo outperformed the benchmark with the Dutch investments but underperformed the index with respect to the British stocks.
Explanation / Answer
Answer 1
Primo Return = 0.6 x 17% + 0.15 x 24% + 0.25 x 20% = 18.8%
Benchmark Return = .05 x 16% +0.4 x 26% +0.1 x 18% = 20.2%
Primo – Benchmark = 18.8% 20.2% = -1.4% (Primo underperformed benchmark)
Answer 2
To isolate the impact of Primo’s pure sector allocation decision relative to the benchmark, multiply the weight difference between Primo and the benchmark portfolio in each sector by the benchmark sector returns:
(.6-.5) x .16 + (.15 - .4) x .26 + (.25-.1) x .18 = -2.2%
Answer 3
To isolate the impact of Primo’s pure security selection decisions relative to the benchmark, multiply the return differences between Primo and the benchmark for each sector by Primo’s weightings:
(.17-.16) x .6 +( .24-.26) x .15 + (.2 - .18) x .25 = .8%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.