Problem 1. Consider the following information regarding the performance of a mon

Question

Problem 1. 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 Benchmark Index Return Actual Return Actual Weight W Weight Equity Bonds Cash 70 .20 10 2% 60 2.5% (S&P; 500) 30 Index) 10 0.5 1.2 (Salomon 0.5 What was the manager's return in the month? What was her over-performance or under performance? (20 points. Round your answer to 2 decimal places.) a. b. What was the contribution of security selection to relative performance? (15 points Round your answer to 2 decimal places.) What was the contribution of asset allocation to relative performance? (15 points. Round your answer to 2 decimal places.) c.

Explanation / Answer

ans (a)

manager's return for the month can be calculated by multiplying returns by allocation percentage (weights)

= 2 *.70 + 1* .20 + 0.5 *.10 = 1.4 + 0.2 + 0.05 = 1.65%

benchmark return for the month= 2.5*0.60+ 1.2*0.30 +0.5 *0.10= 1.5+0.36+0.05= 1.91%

managers return is less thn benchmark return . So there is under performance to the extent of (1.91-1.65)= 0.26%

ans (b)

Thw selected security Equity has given a return of 2.5% in the bench mark return, whereaa the manager's return is only 2%. Also the bench mark return for bonds is 1.2%, whereas actual return is only 1%.This has contributed to under performance

ans (c)

In the benchmark, return 30% or portfolio is allocarted to bonds which gave a 1.2% return. But in the actual only 20% is allocated to bonds.More could have been allocated to bonds, because the returns vary by only (1.2-1)= 0.2%.For equity , bench mark allocation is only 60% , whereas actual allocation is more ,that is 70% and the return varies by a larger percentage (2.5-2) =0.5% .This has contributed to under performance

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