Consider the following information regarding the performance of a money manager

Question

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 Weight 0.6 0.3 0.1 (S& P 500) (Salomon Index) 0.7 Equity Bonds Cash 2.5% 1.2 0.5 2% 0.2 0.5 0.1 What was the manager's return in the month? What was her value-added performance for the month? What was the contribution of asset allocation to relative performance? What was the contribution of security selection to relative performance? a. b. c.

Explanation / Answer

a. Managers Return=w1r1+w2r2+w3r3 0.7*0.02+0.2*0.01+0.1*0.005 = 0.0165 Managers Return=1.65% Benchmark Returns=0.6*0.025+0.3*0.012+0.1*0.005 = 0.0191 Benchmark Returns=1.91% Her Underperformance= 1.91%-1.65% = 0.26% Her Underperformance=0.26% b. Contribution of asset allocation= sum(Wpi-Wbi)*Rbi i=1,2,3 [(0.7-0.6)*2.5+(0.2-0.3)*1.2+(0.1-0.1)*0.5]/100 = 0.0013 Contribution of asset allocation=0.13% c. Contribution of security selection= sum of wpi*(Rpi-Rbi) for i=1,2,3 [0.7(2-2.5)+0.2(1-1.2)+0.1*(0.5-0.5)]/100 = -0.0039 Contribution of security selection= -0.39%

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