11. (worth 12 points) Consider the following information regarding the performan

Question

11. (worth 12 points) Consider the following information regarding the performance of a mon manager in a recent month. The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each asset class in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sect indexes in column (4). ASSET CLASS 1 Actual Return 2) Actual 3) Benchmark 4) Index Retur Equity! 5.0% Bonds | Minus 1.0% 0.5% Weight 0.70 0.15 0.15 Weight 0.75 0.20 0.05 3.0% 1.0% 0.5% Cash a) Compute the Manager's Return for the month. b) Compute the Benchmark ("Bogey") Portfolio Return for the month. c) Compute the Manager's Over (or Under) performance for the month. d) What was the contribution of asset selection to the manager's over (or under) performanc during the month? e) What was the contribution of sector ("industry") and security selection to the manager's ov (or under) performance during the month?

Explanation / Answer

a) Managers return for the month = Equity return*weight of equity + bonds return*weight of bond + cash return*weight of cash

= 5%*0.7 + -1%*0.15*0.5%*0.15

= 3.425%

b) Benchmark portfolio return for the month = 0.75*3% + 0.2*1%+0.05*0.5%

= 2.475%

c) Managers over performance for the month = 3.425% - 2.475%

= 0.95%

d) The contribution of asset selection to managers pver performance is:

Asset class Bechmark Manager Difference Equity 2.25% 3.50% 1.25% Bonds 0.20% -0.15% -0.35% Cash 0.03% 0.08% 0.05%

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