Primo Management Co. is looking at how best to evaluate the performance of its managers. Primo has been hearing more and more about benchmark portfolios and is interested in try this approach. As such, the company hired Sally Jones, CFA, as a consultant to educate the managers on best methods for constructing a benchmark portfolio, how to choose the best benchmark, whether the style of the fund under management matters, and what they should do with their global funds in terms of benchmarking.

For the sake of discussion, Jones put together some comparative 2-year performance numbers that relate to Primos current domestic funds under management and a potential benchmark.

Weight Return

Style Category Primo Benchmark Primo Benchmark

Large-cap growth 0.60 0.50 17 % 16 %

Mid-cap growth 0.15 0.40 24 % 26 %

Small-cap growth 0.25 0.10 20 % 18%

a. What is the within-sector selection effect for each individual asset?

b. Calculate the amount by which the Primo portfolio out-/under-performed the market over the period, as well as the contribution to performance of the pure sector allocation and security selection decisions.

c.If Primo decided to use return-based style analysis, will the R² of the aggregate equation of a passively managed fund be higher or lower than that of an actively managed fund?