Question

a-1. What was the manager’s return in the month? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.)

Problem 24-11 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. Equity Bonds Cash Actual Return Actual Weight 2.4% 0.6 1.4 0.3 0.5 0.1 Benchmark Weight 0.7 0.2 Index Return 2.9% (S&P 500) 1.6 (Barclay's Aggregate) 0.5 0.1

a-2. What was her overperformance or underperformance? (Do not round intermediate calculations. Input all amounts as positive values. Round your answer to 2 decimal places.)

b. What was the contribution of security selection to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

c. What was the contribution of asset allocation to relative performance? (Do not round intermediate calculations. Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

Answer 1

a-1) Manager's return = Equity Return*Equity Weight + Bond Return*Bond Weight + Cash Return*Cash Weight

= 2.4%*0.6+1.4%*0.3+0.5%*0.1 = 1.91%

a-2)

Benchmark's Return = Equity Return*Equity Weight + Bond Return*Bond Weight + Cash Return*Cash Weight

= 2.9%*0.7+1.6%*0.2+0.5%*0.1 = 2.4%

Manager's Performance = Manager's return - Benchmark's Return = 1.91%-2.4% = - 0.49% (under performance)

b)

Differential Return (Manager - benchmark) (1)	Manager's portfolio weight (2)	Contribution to performance (1)*(2)
-0.50%	0.6	-0.30%
-0.20%	0.3	-0.06%
0.00%	0.1	0.00%
		-0.36%

Differential Returns: Manager's return in equity - Benchmark Return in Equity = 2.4%-2.9% = - 0..5%

Manager's return in Bonds - Benchmark Return in Bond = 1.4%-1.6% = - 0.2%

Manager's return in cash - Benchmark Return in cash = 0.5%-0.5% =0%

Contribution to performance to security Selection= Differential returns*weight in manager portfolio = -0.5%*0.6 - 0.2%*0.3 + 0%*0.1 = - 0.36%

c)

Differential weight (Manager - benchmark) (1)	Index return (2)	Contribution to performance of Asset allocation (1)*(2)
-0.1	2.90%	-0.29%
0.1	1.60%	0.16%
0	0.50%	0.00%
		-0.13%

Differential Returns: Manager's Weight in equity - Benchmark Weight in Equity = 0.6-0.7= - 0.1

Manager's Weight in Bonds - Benchmark Weight in Bond = 0.3-0.2 = 0.1

Manager's Weight in cash - Benchmark Weight in cash = 0.1-0.1 =0

Contribution to performance to security Selection= Differential weights*Benchmark's return = -0.1*2.9% - 0.1*1.6% + 0*0.5% = - 0.13%

Excess Performance = -0.36%-0.13% = -0.49%

F 221 .60% Actual Return Actual Weight Benchmark Weight Benchmark return 2 Equity 2.40% 0.6 0.7 2.90% 3 Bonds 1.40% 0.3 0.2 4 Cash 0.50% 0.1 0.1 0.50% 5 6 Manager's Performance 1.910% 7 Benchmark Performance 2.400% -0.490% 9 Differential Return Contribution to (Manager - Manager's performance of benchmark) portfolio Security Selection (1) weight (2) (1)*(2) -0.50% 0.6 -0.30% -0.20% -0.06% 0.00% 0.1 0.00% -0.36% Differential weight Contribution to (Manager - performance of benchmark) Index return Asset allocation (1) (2) (1)*(2) -0.11 2.90% -0.29% 0.1 1.60% 0.16% 0.50%) 0.00% -0.13% 0.3

B 2 Equity 3 Bonds 4 Cash Actual Return 0.024 0.014 0.005 Actual Weight 0.6 0.3 Benchmark Weight 0.7 0.2 Benchmark return 0.029 0.016 0.005 0.1 6 Manager's Performance =SUMPRODUCT(B2:B4,C2:04) 7 Benchmark Performance ESUMPRODUCT(D2:04,E2:E4) 8 =B6-B7 Differential Return (Manager - Manager's portfolio benchmark) (1) weight (2) =B2-E2 =C2 =B3-E3 =C3 Contribution to performance of Security Selection (1)*(2) =C11*B11 Differential weight (Manager benchmark) (1) =C2-D2 =C3-D3 =C4-04 =E2 Contribution to performance Index return (2) of Asset allocation (1)*(2) =F11*G11 =E3 =F12*G12 =F13*G13 =SUM(H11:413) =C12*B12 =B4-E4 -C4 =E4 =C13*B13 =SUM(D11:013)