A2016-Q5-Performance Attribution

[Nimisha]

Hi
In Ques 5 of the April 2016 paper,how do I calculate the benchmark portfolios returns?
I am unable to find any information in the question which seems to suggest a way to find out the benchmark portfolio returns.

I used the start prices to calculate the return on actual portfolio and holding% was taken to be the Weight as per actual sector allocation and benchmark weights were taken to be 25% as per my understanding.

Pls explain as the solution in examiners report is very brief and hence I am unable to solve this question.

 

[Gresham Arnold]

Hi Nimisha

This is covered in detail in the SP5 ASET but:

The question says the benchmark assumes equal weighting in all asset classes - so assume this means that the benchmark assumes 10% of the assets are invested in each of the 10 asset classes given in the question

The question also says that asset allocation decisions are taken at the start of each year - so assume this means that the benchmark fund is rebalanced at the end / start of each year.

Hope that helps

Gresham

 

[Nimisha]

Hi
What you have explained is the benchmark weights but in the question I asked about benchmark returns and not weight.
I am unable to calculate the Benchmark/Notional portfolio return.
So pls tell that.

 

[Gresham Arnold]

Apologies, I mis-read your question. You are right that this is an unusual question in that the examiners give you information to calculate only one set of returns. So you need to assume that the benchmark return uses the actual returns on each asset.

Eg for 2012, if the fund value at the start of the year was $50m and so $5m was invested in each of the 10 assets, then by the end of the year the assets would be worth a total of $52.5m. This gives a return of 52.5/50-1 = 5%, as shown in the Examiners' report

 

[Nimisha]

I just realised that if the benchmark and actual returns are the same then how do I calculate the stock selection profit.
As per the ans given,it is =2.72% and -2.43% for each of the years.But as per what we have studied stock selection profit= F AA -F AN i:e Actual sector weights*actual sector returns-Actual sector Weight *notiinal sector returns.So as per my calculation since notional returns=actual returns the stock selection return is 0%.

 

[Rebecca Barton]

I'm stuck on this question as well - I can't work out how they've calculated the Notional Sector Return

 

[Gresham Arnold]

Hi Nimisha / Rebecca

We have to work at sector level - consider the benchmark allocations/returns and actual allocations/returns for each sector (eg equities is A & B & C combined). If we carried on working stock by stock, then, as you say, the actual and benchmark returns would be equal and we would have no stock selection profits.

So the notional sector return will be actual holding (%) x benchmark return (%) for each sector ie Equities, Fixed Incom, Commodities, Cash.

So overall notional sector return for 2012 will be:

40% x 6.67% + 25% x 6.00% + 28% x 4.00% + 7% x 0% = 5.29%

Have a go and let me know if you are still struggling.

 

[newkid]

Given that the exam is online and we can only copy/paste from Excel, is it more likely that a question like this won't be asked - there is a lot going on, and any mistake on excel, won't be visible if copied and pasted over etc.