Allowing for changes in weights

[claire3000006]

Hi. I'm looking at profit attribution type questions where there are no external cashflows and wondering what the 'correct' approach is for calculating the total return over several period.

There are two options i've come across in the past paper questions:

1. Calculate total return for each asset class and weight by the proportions in each asset class at the start. This doesn't allow for the fact that the weights actually change due to different investment returns. Was given in solution for revision book 4, q5 (subject 301, sept 2002, q13).

2. The more correct method is to calculate the actual fund values for each asset class and time period given the returns, and calculate the total return based on fund value. This is given in the solution to revision book 4, question 31 (oct 2011, q9).

I was wondering if you would be penalised for using the first method, as you get fairly similar results and it's much quicker. Thanks

 

[John Potter]

Hi Claire,

You're dead right that you can use slightly different methods for attribution analysis questions. The important point is that you show all your method and you draw the right conclusions with regards to stock and sector selection.

If you are flexible between the slightly different methods then you can choose the one that you think will be quickest for you on a given question - this is good exam technique and should be commended, you certainly won't be penalised

Good luck!
John