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9. You have performance data for two portfolio managers and a common benchmark portfolio: Benchmark Manager A Manager B Weight Return Weight Return Weight
9. You have performance data for two portfolio managers and a common benchmark portfolio: Benchmark Manager A Manager B Weight Return Weight Return Weight Return Stock 0.6 -5.0% 0.5 -4.0% 0.3 -5.0% Bonds 0.3 -3.5% 0.2 -2.5% 0.4 -3.5% Cash 0.1 0.3% 0.3 0.3% 0.3 0.3% i) Calculate the overall returns of benchmark, Manager A and Manager B. Did these managers under- or outperform the benchmark? ii) Calculate asset allocation effect and security selection effect for both Manager A and B. Comment on what this performance attribution analysis tells you about managers' performance? Micro performance attribution - Decompose portfolio active return (portfolio return benchmark return) to three components: (1) asset allocation, (2) within-asset-class security selection, (3) interaction of the two N N N (WP - WBI) (RBI - RB) + Wi(Rp,i RB,i) + WB,i (RP,i - RB,i) + (WP,i Wb,i)(Rp;i Rb,i) R = i=1 Asset allocation i=1 Within-asset-class security selection i=1 Interaction, should be small where: RA - active return (or value-added return); Wp; - portfolio weight of asset class i; WB,; - benchmark weight of asset class i; Rp; - portfolio return of asset class i; RB,, - benchmark return of asset class i; RB - return on the portfolio's benchmark; N - number of asset class Micro performance attribution Portfolio Benchmark Weight Weight Weight Difference Asset Allocation Security Selection Interaction (WP,i-WB,i) (Rp,i - RB,i) Total WP,i WB,i Asset 65.80% 40.00% WP,i-WB,i 25.80% (WP,i-WB,i)(RB,i- RB) WB, (Rp,i- RB,i) 0.232% -0.027% -0.017% class 1 Asset 14.73% 40.00% -25.27% 0.278% 0.012% -0.007% class 2 Asset 19.47% 20.00% -0.53% -0.002% 0.546% -0.014% class 3 100.00% 100.00% 0.00% 0.508% 0.531% -0.038% 1.001%
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