Answer-first summary for fast verification
Answer: both asset allocation decisions and security selection decisions.
## Explanation To analyze this, we need to calculate the contribution from asset allocation and security selection: **1. Asset Allocation Effect:** - Stocks: (80% - 60%) × (13.0% - 9.4%) = 20% × 3.6% = 0.72% - Bonds: (20% - 40%) × (4.0% - 9.4%) = -20% × -5.4% = 1.08% - Total Asset Allocation Effect = 0.72% + 1.08% = 1.80% **2. Security Selection Effect:** - Stocks: 60% × (11.0% - 13.0%) = 60% × -2.0% = -1.20% - Bonds: 40% × (5.0% - 4.0%) = 40% × 1.0% = 0.40% - Total Security Selection Effect = -1.20% + 0.40% = -0.80% **3. Interaction Effect:** - Stocks: (80% - 60%) × (11.0% - 13.0%) = 20% × -2.0% = -0.40% - Bonds: (20% - 40%) × (5.0% - 4.0%) = -20% × 1.0% = -0.20% - Total Interaction Effect = -0.40% + -0.20% = -0.60% **Total Alpha:** 1.80% (Asset Allocation) + (-0.80%) (Security Selection) + (-0.60%) (Interaction) = 0.40% Since both asset allocation and security selection contributed to the overall positive alpha (though security selection was negative, the combination with positive asset allocation resulted in positive overall alpha), the portfolio generated positive alpha from both decisions.
Author: LeetQuiz Editorial Team
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An investor gathers the following information about their portfolio:
| Asset Class | Portfolio Allocation | Portfolio Return | Benchmark Allocation | Benchmark Return |
|---|---|---|---|---|
| Stocks | 80% | 11.0% | 60% | 13.0% |
| Bonds | 20% | 5.0% | 40% | 4.0% |
| Total | 100% | 9.8% | 100% | 9.4% |
The portfolio has generated positive alpha over the benchmark from:
A
asset allocation decisions only.
B
security selection decisions only.
C
both asset allocation decisions and security selection decisions.