April 2006, Q5

Discussion in 'SP5' started by Jikan, Sep 22, 2009.

  1. Jikan

    Jikan Member

    I know there are already threads about this question, but I haven't seen this question asked.

    In the question, we are given the Index Yield for each index. However, in the examiner's report solution, it seems like this is not used. Should the Index Yield not be taken into account when calculating the return on the benchmark index?
     
    Jikan, Sep 22, 2009
    #1
  2. Simon James

    Simon James ActEd Tutor Staff Member

    The Examiners assumed that the indices were total return indices, and hence the index yield was not used in the calculations.

    We can use the index yields at 31 December 2005 to estimate the investment income that would have been received by the fund if it had invested in line with the indices. This can then be compared to the actual income received.

    A legitimate approach was to assume that the index was capital only and then use the index yield to estimate a total return.
     
    Simon James, Sep 23, 2009
    #2
  3. Jikan

    Jikan Member

    Ok, thanks.
     
    Jikan, Sep 23, 2009
    #3
  4. Alpha9

    Alpha9 Member

    Is the examiner's report solution incorrect anyway?

    I can get the overall figures that they do, (e.g. assuming cash flows at end of period, so using their "Alt" figures):
    Fund outperformance of 5.97%
    Represented by 1.10% stock selection (I got 1.11%, and so would the examiners if their figures had added up)
    Sector allocation of 4.86% (I got 4.87%)
    Of which currency is 0.85% (I agreed this, although the examiners' figures add to 0.84%).

    However, within each sector my figures start diverging rapidly from those of the examiners: e.g. Japan currency: I get -0.25% (i.e. {20% - 15%} × -5%) whereas the examiner got -0.35%; and for sector allocation for Japan, my answer of (20% - 15%) × 16.92% = 0.85% is a long way from their 0.03%! If anything I could have got an even higher figure for sector allocation because the average Japan exposure over the year was more than 20%.

    Apart from US and cash, the other sectors I get very different too.

    How did they come up with their answers?

    This is of particular concern given that the core reading refers to this very question and the examiners' answer as an example of how to do things!

    Update

    Too late now for this session, but the answer is set out well here:
    http://www.acted.co.uk/forums/showthread.php?t=490
    eg for Japan's asset allocation I needed to consider the relative return to the whole notional benchmark, i.e. .05 × (16.92% - 16.23%).
     
    Last edited by a moderator: Oct 2, 2009
    Alpha9, Sep 30, 2009
    #4

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