Consider the following information regarding the performance of a money manager in a recent month. The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column (4).
(1) (2) (3) (4)
Actual Actual Benchmark Index
Return Weight Weight Return
Equity 2.0% 0.70 0.60 2.5% (S&P 500)
Bonds 1.0 0.20 0.3 1.2 (Aggregate Bond Index) Cash 0.5 0.10 0.10 0.5
a. What was the manager's return in the month? What was her over- or underperformance?
b. What was the contribution of security selection to relative performance?
c. What was the contribution of asset allocation to relative performance? Confirm that the sum of selection and allocation contribution equals her total "excess" return relative to the bogey.