Explanation:
D is correct.
The portfolio manager's asset allocation contribution is computed by summing the differences between the portfolio and benchmark weights of each asset class multiplied by the benchmark performance of that asset class.
Contribution from asset allocation:
[(58%-50%)*11%] + [(42%-50%)*7%] = 0.32%
A is incorrect. It is the contribution from security selection:
58%(8%-11%) + 42%(6%-7%) = -2.16%
B is incorrect. It is the total excess return:
0.32% - 2.16% = -1.84%
C is incorrect. -0.16% is found by using the below equation for each asset and summing the results:
(Portfolio Weight – Benchmark Weight)(Portfolio Return – Benchmark Return)
(58%-50%)(8%-11%)+(42%-50%)*(6%-7%) = -0.16%.
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| 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?
A
-2.16%
B
-1.84%
C
-0.16%
D
0.32%
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