Question

Primo Management Co. is looking at how best to evaluate the performance of its managers. Primo has been hearing more and more about benchmark portfolios and is interested in trying this approach. As such, the company hired Sally Jones, CFA, as a consultant to educate the managers on the best methods for constructing a benchmark portfolio, how best to choose a benchmark, whether the style of the fund under management matters, and what they should do with their global funds in terms of benchmarking.
For the sake of discussion, Jones put together some comparative 2-year performance numbers that relate to Primoâs current domestic funds under management and a potential benchmark.

Weight Return
Style Category Primo Benchmark Primo Benchmark
Large-cap growth 0.60 0.50 17 % 16 %
Mid-cap growth 0.15 0.40 24 26
Small-cap growth 0.25 0.10 20 18
As part of her analysis, Jones also takes a look at one of Primoâs global funds. In this particular portfolio, Primo is invested 75% in Dutch stocks and 25% in British stocks. The benchmark invested 50% in eachâDutch and British stocks. On average, the British stocks outperformed the Dutch stocks. The euro appreciated 6% versus the U.S. dollar over the holding period while the pound depreciated 2% versus the dollar. In terms of the local return, Primo outperformed the benchmark with the Dutch investments, but underperformed the index with respect to the British stocks.

a.
Calculate the amount by which the Primo portfolio out- (or under-) performed the market over the period? (Round your answer to 1 decimal place. Input the amount as positive value. Omit the "%" sign in your response.)

Primo portfolio underperformed by _________??
b.
Calculate the contribution to performance of the pure sector allocation?(Negative amount should be indicated by a minus sign. Round your answer to 1 decimal place.Omit the "%" sign in your response.)

Pure sector allocation ___________%??
c.
Calculate the contribution to performance of the security selection decisions?(Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Security selection decisions ______________%??

Answer 1

Answer:

(A). -1.4%

(B) -2.2%

(C).  0.8%

Explanation:

According to the scenario, computation of the given data are as follow:-

A). Primo Return= Primo Weight × Primo Return

Large Cap Primo Return = 0.6 × 17 ÷ 100 = 0.102

Mid Cap Primo Return=0.15 × 24 ÷ 100 = 0.036

Small Cap Primo Return=0.25 × 20÷100 = 0.05  

Total Primo Return = 0.102 + 0.036 + 0.05

= .188 Or 18.8%

Benchmark Return = Benchmark Weight × Benchmark Return

Large Cap Benchmark Return=0.50 × 16÷100 = 0.08

Mid Cap Benchmark Return=0.40 × 26÷100 = 0.104

Small Cap Benchmark Return=0.10 × 18÷100 = 0.018

Total Benchmark Return = 0.08 + 0.104 + 0.018

= 0.202 Or 20.2%

Primo Under performed Benchmark = Primo Return - Benchmark Return

= 18.8% - 20.2%

= -1.4%

B). Pure Sector Allocation = ( Primo Weight - Benchmark Weight) × Benchmark Return

= (0.6 - 0.50) × 16% + (0.15 - 0.40) × 26% + (0.25-0.10) × 18%

= 0.10 × 0.16 - 25 × 0.26+.15 × 0.18

= 0.016 - 0.065 + 0.027

= -0.022 Or -2.2%

C). Security Selection Decisions = (Primo Return - Benchmark Return) × Primo Rate

= (.17 - .16) × .6 + (.24 - .26) × .15 + (.20.18) × .25

= 0.006 - 0.003 + 0.005

= 0.008 or 0.8%