Stock Selection Profit At Asset Class Level

[wyatt.krs]

Hi all,

I'm looking at April 2010 Question 6(iii) and October 2011 Question 9(iii), both of which asked for stock selection profit at asset class level.

In the Core Reading, it says to determine the contribution of each asset class to the overall stock selection profit we calculate:

actual sector weight x (actual sector return – notional sector return)

I can this formula is being applied in October 2011 Question 9(iii) but not in April 2010 Question 6(iii) and I can't figure out why this is the case. Can someone please explain?

Many thanks in advance.

 

[Gresham Arnold]

Hi, I think the issue is simply the way the stock selection profit is being expressed.

Looking at the April 2010 question: The Examiners provide a table of figures in their Report and appear to have calculated the stock selection profit in each sector as actual sector return - notional sector return ie they haven't applied the actual sector weight.

So they have expressed each stock selection profit figure as a % of the money invested in that sector.

If they multiplied each figure by the actual sector weight they would have calculated stock selection profit in a sector as a % of the total fund. Which would have been fine.

At the bottom of the table the examiners have calculated overall stock selection profit. In doing this, they have multiplied the stock selection profit in each sector by the relevant sector weight and then added them together. So, they have applied the sector weights at this stage of their calculations, rather than applying them when calculating the stock selection profit for each individual sector.

I can't see anything in the question that specifies which approach should be used. It looks like our solution in Revision Notes (if that is what you are looking at) follows the Examiners' approach.

Whichever approach you use, it's probably worth stating clearly whether your performance figures are expressed as a % of the money invested in that sector or a % of the total fund.

I hope that helps?

Gresham