A2016-Q5-Performance Attribution

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

 

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

 

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.