1. During a particular year, the Treasury note rate was 2.5%, the market return was 7.5% and a portfolio manager with beta of 1.2 realised a return of 7.5%. Evaluate the manager based on the portfolio alpha. (3 marks)

2. Consider the following information regarding the performance of a money manager in a recent month. The table presents the actual return of each sector of the managers 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 indexes in column (4).

	(1) Actual Return	(2) Actual Weight	(3) Benchmark Weight	(4) Index Return
Equity	3%	0.55	0.5	2.5%
Bond	1.5%	0.35	0.4	1.2%
Cash	0.50%	0.10	0.1	0.50%

Required:

1. What was the managers return in the month? What was her over- or under-performance? (3 marks)

2. What was the contribution of security selection to relative performance? (3 marks)

iii. What was the contribution of asset allocation to relative performance? Confirm that the sum of selection and allocation contributions equals her total excess return relative to the bogey.