6 - In a particular year, ABC Fund earned the following investment returns in as

Question

6 - In a particular year, ABC Fund earned the following investment returns in asset classes:

The return on a bogey portfolio earned the following investment returns:

Weight

Return

Bonds

20%

6%

Stocks

80%

15%

Weight

Return

Bonds (Aggregate bond index)

30%

5%

Stocks (S&P 500 index)

70%

12%

(1) Compute the total excess return on the managed portfolio in ABC Fund (i.e, the average return on the managed fund – the average return on the bogey portfolio).

(2) Compute the contribution of asset allocation across markets to the total excess return.

(3) Compute the contribution of security selection within asset classes to the total excess return.

Weight

Return

Bonds

20%

6%

Stocks

80%

15%

Explanation / Answer

1)

Excess return = (20%*6% + 80%*15%) - (30%*5% + 70%*12%)

= 13.2% - 9.9%

= 3.3%

2)

(80% - 70%)*(15% - 13.2%) + (20% - 30%)*(6% - 13.2%) = 0.9%

3)

(30%*(6%-5%) + 70%*(15%-12%)) = 2.4%

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