Question 4

Magnum Funds is a well-diversified balanced mutual fund. Following table provides details about Magnums portfolio return from various asset classes, its portfolio allocation to various assets, the asset allocations of the benchmark portfolio and the index returns in various asset classes.

Assets	Actual Return	Actual Weight	Benchmark Weight	Index Return
Equity	6.5%	0.6	0.5	6%
Bond	2.3%	0.3	0.4	2.5%
Cash	0.5%	0.1	0.1	0.5%

Based on the information above answer following questions.

a)Estimate Magnums relative performance in comparison to its benchmark?

b)What is the contribution of asset allocation decisions to Magnums relative performance compared to the benchmark?

c)What is the contribution of security selection decision to Magnums relative performance compared to the benchmark?

d)Based on your understanding of the risk adjusted portfolio performance measures answer following questions:

Performance ranking of investment portfolios based on Sharpe ratios may differ from the performance ranking based on M² measure.

Do you agree? Explain your answer with reasons.