Q) You are in the process of evaluating the performance of one of your portfolio managers against pre-set company targets. You have the following information:

Risk-free rate is 4%

Return on the market portfolio is 15%

Return on portfolio is 23%

Actual beta of Portfolio is 1.3, while target beta is 1.0

Standard deviation of Portfolio is 12%

Standard deviation of the market portfolio is 8%

Using Fama Decomposition, calculate the following for the portfolio:

a) Return from Investor's risk (1 marks)

b) Return from Manager's risk (1 marks)

c) Return from Diversification (2 marks)

d) Return from Net Selectivity (2 marks)

e) Return from Selectivity (2 marks)

f) Evaluate the performance of this portfolio against each of the following company targets and comment on your results assuming return from selectivity is the most important criteria for your firm.

Criteria	Company Target (%)
Return from investor's risk	5
Return from managers' risk	3
Return from Diversification	2
Return from Net Selectivity	14
Return from Selectivity	16

g) Critically analyse the reasonableness (or otherwise) of using this method of performance evaluation.