ST5 September 2016 Q7 - performance attribution

[actuarialstudent2011]

I am trying to calculate the sector selection for Q7 of the September 2016 past paper but can't work it out.

I have calculated the stock selection so I am able to work out what the sector selection is just be taking the stock selection away from the Total Fund out performance in each year.

However, if I was wanting to calculate the sector selection from first principles, how would I do this? I have tried this using the normal formula for sector selection but I haven't been able to get the correct answers of 0.18% for Year 1 and 0.21% for Year 2.

Any help would be appreciated thanks!

 

[Simon James]

As an example, small cap equity sector selection profit in Year 1 is calculated as:
\[ (27.5\% - 20\% ) \times (9.00\% - 6.80\% ) = 0.17\% \]

 

[Actuaryin training]

I am having difficulty with this question - for the stock selection for equities I am using the formula: actual % invested x (actual return - benchmark return) giving me for Year 1: 62.5% x (9.92% - 8.67%) = 0.781% and similarly for fixed income for year 1 I get: 32.5% x (2.92% - 4%).
Then for sector performance I use the formula of (actual % allocation - benchmark % allocation) x (benchmark return of the asset - benchmark return of the fund) and get for Year 1: (62.5% - 60%) x (8.67% - 6.8%) + (32.5% - 40%) x (4% - 6.8%) = 0.26%

 

[Simon James]

Hi - as in the other thread - are you ignoring the cash asset class? - you only have two assets that don't add up to 100%

 

[Actuaryin training]

Hi,
I have corrected that error but I am still not getting the right answers for this. I am confused by the phrasing of the question to be honest. For the stock selection of the equities, for Year 1, I am getting 0.625 x (9.92% - 8.67%) = 0.78% - the solution shows 1%. This is just the actual % invested x (actual return - benchmark return).
I am calculating the stock selection for bonds in a similar way and again, this is not working out. For Year 1 I have 0.325 x (2.9% - 4%).
For the sector asset allocation, now including the cash, I am also not getting the right answer. The numbers I have for Year 1 are: (0.625 - 0.6) x (8.67% - 6.8%) + (0.325 - 0.4) x (4% - 6.8%) + (0.05 - 0) x (0% - 6.8%) = -0.08%

 

[Simon James]

Hi. Your numbers are correct. You must be looking at the solution in the Examiners' Report? The Examiners’ Report expresses the stock selection profit for equities and bonds in Years 1 and 2 as a percentage return on the asset class (rather than on the whole fund). You can obtain the figures in the Examiners’ Report from the figures above by taking stock selection profit for equities and bonds in each year, then dividing these figures by the percentage of the fund invested in each asset class.

PS [advert] this is why we recommend using ASET, as it discusses these sorts of issues arising from the ER

 

[Jaitika]

Can somebody please post their working here? My answers just don't seem to tally with that given in the examiners report.

Thanks.

 

[TxelA]

"[For the stock selection of the equities, for Year 1, I am getting 0.625 x (9.92% - 8.67%) = 0.78% - the solution shows 1%. This is just the actual % invested x (actual return - benchmark return)]"

Can I ask why you have done this? The Core Reading suggests that stock selection profit should be actual % invested * (actual sector return - NOTIONAL sector return) ?

 

[Andrew Kinsella]

Hi I was working through and marking myself on this exam paper. When attempting this question I calculated value added from stock selection/sector selection in terms of millions of dollars. I notice that in the examiner's report the solution is instead given in percentages. Is it necessary to give the answer in percentages or would I have achieved full marks for my approach? Thanks.

 

[Colin McKee]

In our ASET we explore two methods of completing this question. Method 1 does look at the amounts in each sector at each time period. But in the end we have expressed it as a percentage. I think your method would have scored well if your numbers were correct, but to get full marks you usually have to set it out in percentage terms.

 

[Andrew Kinsella]

Fantastic thanks

 

[dimitris13]

hi
i cannot understand why we put the last table in the solution where we show the value added forvexample equities (0.72) when in the previous table we show for equities 0.07. whta confuses me is that before both tables the solutuon mentions

" the table shows the value added by sector asset alloc decisions"

in addition i dont get at which point we are asked to give both tables?
1st and 2nd bullet table 3 in solution
4th bullet 2nd table and answer 0.59
3rd bullet: 4th or 5th table?

 

[Colin McKee]

Hi. The question does not ask for a number of tables as such, but ActEd have broken the ASET solution down into a number of tables in order to separate the main areas of sector selection and stock selection.
The reason the two numbers differ as you say, is because one has been calculated using "method 1" and the other using "method 2". We mention at the start of the solution that there are two ways of approaching this question:
At this stage in the calculations you can group the asset allocations and returns into three categories: equities, bonds and cash. This will minimise the calculations you need to perform, and is described as Method 1 below.

Alternatively, you could adopt Method 2, which involves performing calculations for all six asset classes separately and then combining figures at the end. This involves more calculations, which may be more time-consuming in the exam.

The results of your analysis will be affected by the method you adopt, but we believe either approach would have scored full marks in the exam. Indeed, the Examiners’ Report notes that there were a number of potential solutions and it was possible to gain full marks irrespective of the method used.

I hope this helps.

 

[dimitris13]

what i am trying to understand is where the solution ends at revision notes ? i think the last table is not requested from the solution as it has already been answered in the previous one.

 

[Colin McKee]

I think the revision notes have accidentally included the final table from method 2 at the end of the solution. The main solution uses method 1, so the final table should not be in there. Well spotted. I will remove this at the next update.

 

[dimitris13]

thanks. this was my understanding.

 

[Zhehao]

I meet one question on attribution analysis. 2016 Sep Q7.

I tried the calculations on the excel, while I have not achieved the same number as the solution for benchmark value at end year 2. If the solutions are produced by excel, then the result shall be same. I agree with the solution that the benchmark value at the end of year 1 is 213.6. Considering the 60 disinvestment and the components within the benchmark portfolio are equally weighted, then the investment in each components is 30.7. In that case, the emerging market equities within the benchmark at the end of year 2 shall be 33.48, without loss of accuracy. While the model solution is 33.6374.

I did not find a way to upload my excel calculations here. If there is way, very happy to know.

Also, the last part of the solution mentioned that “Asset allocation – has added minimal value over the period.” I do not understand this, since sector selection provides a return about 0.18% in the first year and 0.21% in the second year. And it provides a better result that stock selection. So what does asset allocation mean here?

Many thanks.

 

[Admin]

We have merged your thread with others on the same exam question in case anything above helps.

 

[TIBERIUSNYABIGO]

Any one with the calculation kindly can upload it here