value: 2.00 points Primo Management Co. is looking at how best to evaluate the p
ID: 2793330 • Letter: V
Question
value: 2.00 points Primo Management Co. is looking at how best to evaluate the performance of its managers. Primo has been hearing more and more about benchmark portfolios and is interested in trying this approach. As such, the company hired Sally Jones, CFA, as a consultant to educate the managers on the best methods for constructing a benchmark portfolio, how best to choose a benchmark, whether the style of the fund under management matters, and what they should do with their global funds in terms of benchmarking For the sake of discussion, Jones put together some comparative two-year performance numbers that relate to Primo's current domestic funds under management and a potential benchmark Wei 60 .25 Style Category Primo Benchmark Primo Benchmark 50 40 10 17% 24 20 16% 26 Large-cap growth Mid-cap growth Small-cap growth As part 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 a. 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.) Primo portfolio underperformed b. Calculatethe 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.) -2.2% Pure sector allocation c. Calculate the contribution to performance of the security selection decisions. (Do not round intermediate calculations. Round your answer to 1 decimal place.) Security selection decisions 0.8 %Explanation / Answer
a.) Primo 's Return = 0.60x17.00 + 0.15x24.00 + 0.25x20.00
= 10.20 + 3.60 + 5.00
= 18.80%
Benchmark Return = 0.50x16.00 + 0.40x26.00 + 0.10x18.00
= 8.00 + 10.40 + 1.80
= 20.20%
Since, benchmark returns are higher, Primo's manager has underperformed by 20.20-18.80 =1.40%
b.) Contribution of Asset Allocation = Difference of Weights x Difference of Asset Class Returns from Benchmark
= (0.60 - 0.50)x(16.00-20.20) + (0.15 - 0.40)x(26.00-20.20) + (0.25-0.10)x(18.00-20.20)
= -0.42 - 1.45 - 0.27
= -2.14%
b.) Contribution of Security Selection = Difference of Returns x Weight of Managed Portfolio
= (17.00 - 16.00)x0.60 + (24.00 -26.00)x0.15 + (20.00-18.00)x0.25
= 0.60 - 0.30 + 0.50
= 0.80%
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