Explanation:
As observed from the regression output, R² is equal to 94%. This indicates that 94% variability in the fund’s return can be explained by asset allocation to the portfolios indicated above. The four portfolio’s viz. small cap, large cap, high P/E and T -Bills explain the 94% variance in the fund’s return. The remaining 6% of the fund’s return variability can be attributed to security selection within the asset classes as well as the timing of the fund manager.
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Q.2566 A fund manager wants to carry out a style analysis on the portfolio he himself manages for his clients. He identifies four style portfolios as indicated below:
Style portfolio
T-Bills
Small Cap
High P/E
Large Cap
The manager then regresses the fund’s rate of return on the above style portfolios. The regression results are given below:
| Style portfolio | Regression Coeff. |
|---|---|
| T-Bills | 23 |
| Small Cap | 20 |
| High P/E | 28 |
| Large Cap | 29 |
| α | 23 |
| R² | 94% |
Which of the following statements is correct?
A
94% of variability in the fund’s return can be attributed to security selection within the asset classes as well as the timing of the fund manager.
B
77% of variability in the fund’s return can be attributed to security selection within the asset classes as well as the timing of the fund manager.
C
23% of variability in the fund’s return can be attributed to security selection within the asset classes as well as the timing of the fund manager.
D
None of the above.
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