EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
expand_more
expand_more
format_list_bulleted
Question
Chapter 24, Problem 17PS
Summary Introduction
To calculate: The within-sector selection effect in case of each individual sector.
Introduction:
Within-sector selection effect: This effect can be experienced when the benchmark weight is multiplied with the difference in portfolio return and benchmark return.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Primo Management Company 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 to choose the best 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 two-year performance numbers that relate to Primo’s current domestic funds under management and a potential benchmark.
Style Category
Weight
Return
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 Primo’s global funds. In this particular portfolio, Primo is invested…
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 to choose the best
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 Primo's current domestic funds under management and a potential benchmark.
Style Category
weight of
Primo
Large-cap
growth
Mid-cap growth 0.15
Small-cap
growth
0.60
0.25
weight of
Benchmark
0.50
0.40
0.10
return of Primo return of Benchmark
(%)
(%)
17
23
19
14
26
17
Calculate the contribution to performance of the pure sector allocation. Round your answer to
two decimal place. Do not…
Primo Management Company 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 to choose the best 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 two-year performance numbers that relate to Primo’s current domestic funds under management and a potential benchmark.
Style Category
Weight
Return
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 Primo’s global funds. In this particular portfolio, Primo is invested…
Chapter 24 Solutions
EBK INVESTMENTS
Ch. 24 - Prob. 1PSCh. 24 - Prob. 2PSCh. 24 - Prob. 3PSCh. 24 - Prob. 4PSCh. 24 - Prob. 5PSCh. 24 - Prob. 6PSCh. 24 - Prob. 7PSCh. 24 - Prob. 8PSCh. 24 - Prob. 9PSCh. 24 - Prob. 10PS
Ch. 24 - Prob. 11PSCh. 24 - Prob. 12PSCh. 24 - Prob. 13PSCh. 24 - Prob. 14PSCh. 24 - Prob. 15PSCh. 24 - Prob. 16PSCh. 24 - Prob. 17PSCh. 24 - Prob. 18PSCh. 24 - Prob. 19PSCh. 24 - Prob. 20PSCh. 24 - Prob. 21PSCh. 24 - Prob. 22PSCh. 24 - Prob. 1CPCh. 24 - Prob. 2CPCh. 24 - Prob. 3CPCh. 24 - Prob. 4CPCh. 24 - Prob. 5CPCh. 24 - Prob. 6CPCh. 24 - Prob. 7CPCh. 24 - Prob. 8CPCh. 24 - Prob. 9CPCh. 24 - Prob. 10CPCh. 24 - Prob. 11CPCh. 24 - Prob. 12CPCh. 24 - Prob. 13CPCh. 24 - Prob. 14CP
Knowledge Booster
Similar questions
- II. III. You are evaluating the performance of two fund managers to help a client understand their strengths and weaknesses in security selection and asset allocation. The data relevant to the performance of these two fund managers and those of a benchmark portfolio are given in the following table: Manager/Benchmark Total return Manager A Manager B Benchmark portfolio Return attributable to security selection Return attributable to asset allocation 8% -1% 5.2% 6% -2% 4% 5% 5% -0.2% Assume that the data for managers A and B reflect average performance over the most recent five years and both managers actively manage their portfolios. Briefly describe one strength and one weakness for each manager. A globally diversified portfolio faces a lower market risk than a domestically diversified portfolio. Examine the above statement with reference to possible benefits of international diversification. Use an appropriate graph to illustrate.arrow_forwardUse the following to answer questions a. – f. a. What is the alpha for Fund B? b. Based on alpha, which fund displays superior performance? c. What is the Sharpe ratio for Fund B? d. Based on the Sharpe ratio, which fund displays superior performance? e. Suppose you are an investment counselor with a new client, Jonsey, and that Funds A and B are the only options available in Jonsey's company sponsored retirement account. Jonsey has no other investments. Which fund would you recommend, and why? f. What additional evidence would make you more confident in your recommendation, that is, more confident that the fund you recommend has the ability to perform in the future? (Hint: The answer has nothing to do with the Treynor Index.)arrow_forwardABC has a substantial number of clients who wish to own a mutual fund portfolio that closely matches the performance of the S&P 500 stock index. A manager at ABC has selected five mutual funds (shown in the table below) that will be considered for inclusion in the portfolio. The manager must decide what percentage of the portfolio should be invested in each mutual fund. Based on the given information, please create your spreadsheet model and find the optimal portfolio. Please submit your business model and solution. Table: Five Mutual Funds and Annual Returns Mutual Fund Year 1 Year 2 Year 3 Year 4 International Stock $15.64 $17.62 $5.80 $3.13 Large-Cap Blend $15.31 $18.77 -$5.06 $1.75 Mid-Cap Blend $18.74 $18.43 $6.28 -$1.04 Small-Cap Blend $14.19 $12.37 $1.92 $7.32 Intermediate Bond $7.88 $9.45 -$1.56 $3.31 S&P 500 $13.00 $12.00 $7.00 $1.50arrow_forward
- During the annual interview of Acme's Pension Plan, several trustees questioned Lucy Graham a pension consultant,about various aspects of performance measurement and risk assessment. In particular, one trustee asked about the appropriateness of using each of the following benchmarks; I). Market index II). Benchmark normal portfolio III). Median of the manager universe IV). Explain 2 different weaknesses of using each of the three benchmarks to measure the performance of a portfolioarrow_forwarda. John Wilson is a portfolio manager at Austin & Associates. For all of his clients, Wilson manages portfolios that lie on the Markowitz efficient frontier. Wilson asks Mary Regan, CFA, a managing director at Austin, to review the portfolios of two of his clients, the Eagle Manufacturing Company and the Rainbow Life Insurance Co. The expected returns of the two portfolios are substantially different. Regan determines that the Rainbow portfolio is virtually identical to the market portfolio and concludes that the Rainbow portfolio must be superior to the Eagle portfolio. Do you agree or disagree with Regan’s conclusion that the Rainbow portfolio is superior to the Eagle portfolio? Justify your response with reference to the capital market line.b. Wilson remarks that the Rainbow portfolio has a higher expected return because it has greater nonsystematic risk than Eagle’s portfolio. Define nonsystematic risk and explain why you agree or disagree with Wilson’s remark.arrow_forwardYou are an employee at XYZ Bank. Your Bank is trying the construct an investment portfolio that matches its resources and goals. To do so, you and your team are required to evaluate the investment options available for your Bank and decide what is the best option to choose. A B C D E Value of the position 1,400,500 1,370,050 750,000 450,300 1,700,650 Duration 5 3 5 4 6 YTM 4% 3% 7% 8% 5.50% Potential adverse move in yield 0.30% 0.26% 0.43% 0.56% 0.37% Correlation A B C D E A 1 0.5 0.3 0.1 -0.2 B 1 0.2 -0.3 0.4 C 1 0.2 -0.3 D 1 -0.4 E 1 Weight A B C D E Scenario I…arrow_forward
- Which of the following does attribution analysis involve? A) Carrying out sensitivity analysis to the actual holdings of shares in the portfolio. B) Comparing the performance of a fund to its stated benchmark or its peer grouping. C) Examining past annualised returns across 5 and 10 years to determine whether the investment style is true to label. D) Breaking down fund performance to find which proportion comes from sector and security selection, asset allocation and their interaction.arrow_forwardA. Based on the Sharpe ratio, which fund displays superior performance? B. Suppose you are an investment counselor with a new client, Jonsey, and that Funds A and B are the only options available in Jonsey's company sponsored retirement account. Jonsey has no other investments. Which fund would you recommend, and why? C. What additional evidence would make you more confident in your recommendation, that is, more confident that the fund you recommend has the ability to perform in the future? (Hint: The answer has nothing to do with the Treynor Index.)arrow_forwardRead the CFA Institute's Code of Ethics and Standards of Professional Conduct In your journal, begin to contemplate the link between your adherence to a code of ethics and the performance of your duties as an investment professional working specifically for the client in this case. What are your observations on the applicability of the code thus far in managing the portfolio? what standards will you explain to your new client?arrow_forward
- During the annual review of Acme’s pension plan, several trustees questioned their investment consultant about various aspects of performance measurement and risk assessment.a. Comment on the appropriateness of using each of the following benchmarks for performance evaluation:∙ Market index.∙ Benchmark normal portfolio.∙ Median of the manager universe.b. Distinguish among the following performance measures:∙ The Sharpe ratio.∙ The Treynor measure.∙ Jensen’s alpha.i. Describe how each of the three performance measures is calculated.ii. State whether each measure assumes that the relevant risk is systematic, unsystematic, or total. Explain how each measure relates excess return and the relevant risk.arrow_forwardYou are an employee at XYZ Bank. Your Bank is trying the construct an investment portfolio that matches its resources and goals. To do so, you and your team are required to evaluate the investment options available for your Bank and decide what is the best option to choose. A B C D E Value of the 1,400,500 1,370,050 750,000 450,300 1,700,650 position Duration 5 4 6 YTM 4% 3% 7% 8% 5.50% Potential adverse move 0.30% 0.26% 0.43% 0.56% 0.37% in yield Correlation A. В D E A 1. 0.5 0.3 0.1 -0.2 B 1 0.2 -0.3 0.4 1 0.2 -0.3 D 1. -0.4 E Weight А В D E Scenario I 30.00% 10.00% 60.00% Scenario II 50.00% 30.00% 20.00% Scenario III 50.00% 50.00%arrow_forwardFor the portfolio project, you will select a topic of interest to you (please avoid controversial topics like diversity & inclusion, politics and religion). It should be a topic that you can develop a survey and obtain feedback to analyze and present results. You can choose quantitative, qualitative, or mixed method (if you want to practice both quantitative and qualitative analysis). Your portfolio project will have four deliverables; three milestones and a final submission. Milestone #1 – Research Project Overview (Week Two) Introduction: Provide a brief overview of the research project. Describe the topic you are focusing on and establish the rationale behind your choice. Use the model for introduction on page 111 in Creswell & Creswell. Purpose: Describe the main topics that you will examine in the context of the survey. You do not need to discuss the specific survey questions here. Rather, focus on the broader topics and themes that you will address in the…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education