Explanation:

Explanation

The contribution from asset allocation is calculated by summing the differences between the portfolio and benchmark weights of each asset class multiplied by the benchmark performance of that asset class.

Calculation:

Equity: (58% - 50%) × 11% = 0.08 × 0.11 = 0.0088 (0.88%)
Fixed Income: (42% - 50%) × 7% = -0.08 × 0.07 = -0.0056 (-0.56%)
Total Asset Allocation Contribution: 0.88% - 0.56% = 0.32%

Why other options are incorrect:

A (-2.16%): This is the contribution from security selection: 58%×(8%-11%) + 42%×(6%-7%) = -2.16%
B (-1.84%): This is the total excess return: 0.32% - 2.16% = -1.84%
C (-0.16%): This is found by using (Portfolio Weight – Benchmark Weight)×(Portfolio Return – Benchmark Return) for each asset and summing the results: (58%-50%)×(8%-11%) + (42%-50%)×(6%-7%) = -0.16%

The positive 0.32% indicates that the portfolio manager's asset allocation decisions added value to the portfolio relative to the benchmark.

A fund of funds (FOF) manager is conducting a performance attribution analysis for a portfolio consisting of equity and fixed-income securities to evaluate the effects of the portfolio manager's asset allocation and security selection decisions. The FOF manager uses the information presented below:

Asset class Portfolio weight Benchmark weight Portfolio return Benchmark return
Equity 58% 50% 8% 11%
Fixed income 42% 50% 6% 7%

What is the contribution of the portfolio manager's asset allocation decision to the portfolio's overall excess return?

Asset class	Portfolio weight	Benchmark weight	Portfolio return	Benchmark return
Equity	58%	50%	8%	11%
Fixed income	42%	50%	6%	7%

Real Exam

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LLeetQuiz

-2.16%

15.4%

-1.84%

0.0%

-0.16%

0.32%

84.6%

Financial Risk Manager Part 2

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Explanation

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