Question 4 (20 Marks). a) Consider the following information regarding the perfo

Question

Question 4 (20 Marks). a) Consider the following information regarding the performance of a money manager in a recent month. Benchmark |Benchmark Actual ReturnWeight 2% 1% 0.5% Actual return 0.70 0.20 0.10 0.60 30 10 weight 2.5% 1.2% 0.5% Stocks Bonds securities Required L What was the managers return in the month? What was her over performance (6 marks) Page 3 af 6 ter One Final Examinations, 2017 FINM3402 Investments and Portfolio Manageme li. What were the contributions of security selection and asset alocation to (6 marks)

Explanation / Answer

1. Expected Return in the month = return of stocks* actual weight of stocks+ return on bond *actual weight of bond + return on marketable securities * actual weight of securities =2%*0.7+1%*0.2+0.5%*0.1 = 1.65%

Benchmark return = 2.5%*0.6+1.2%*0.3+0.5%*0.1 = 1.91%
So the mangers underperformance =1.91%-1.65% =0.26%(return of money manager is less than market returns)

b)Contribution of security selection
Equity = (Portfolio return-Benchmark return)*Actual weight =(2%-2.5%)* 0.7= -0.35%
Bond = (Portfolio return-Benchmark return)*Actual weight =(1 %-1.2%)*0.2= -0.04%
Securities = (Portfolio return-Benchmark return)*Actual weight =(0.5%-0.5%)*0.1= 0%
Contribution of security selection = -0.35%-0.04%+ 0.0%= -0.39%

Contribution of asset selection

Equity =(Portfolio wt- Benchmark wt)* Benchmark return=(0.7 -0.6)*2.5%= 0.25%
Bond = (Portfolio wt- Benchmark wt)* Benchmark return=(0.2-0.3)*1.2%= -0.12%
Securities = (Portfolio wt- Benchmark wt)* Benchmark return=(0.1-0.1)*0.5%=0.00%

Contribution of asset selection = 0.25%- 0.12%+.00%= 0.13%
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