BHB Model as we see in financials that managers has over wt that sector compared to benchmark which is giving us higher re

Andd in the allocation it is having a positive impact of 2.17%.

As we see in health care and IT that the portfolio manager has under weighted the sectors that are performing better than the

Allocation Effect Selection Effect Interaction Effect

(Wp-Wb)*Rb (Rp-Rb)*Wb (Wp-Wb)*(Rp-Rb)
 which is giving us higher returns 15.2% compared to benchmark return 14.8% that means a allocation manager has made a good decision

e performing better than the benchmark (25.1% and 20.1% respectively) then the avg benchmark that is 14.8% , so he has not made a wise

12530
15047
27577
7577
anager has made a good decision so he should be rewarded

4.8% , so he has not made a wise allocation decision here and that is why it has a negative allocation impact.
The following information is available for an actively managed portfolio and its benchmark -
Stock Portfolio Weight (Wp) Benchmark Weight (Wb) Expected Return Active Return
A 22% 25% 12% -3%
B 20% 25% -6% -5%
C 21% 25% 4% -4%
D 37% 25% 19% 12%
Calculate Portfolio Active Returns 2.06%

Solution:
Portfolio Return 9.31%
Benchmarks Return 7.25%
Active Return 2.06%
Stock Portfolio Weight (Wp) Benchmark Weight (Wb) Expected Return Active Return
A 22% 25% 12% -3%
B 20% 25% -6% -5%
C 21% 25% 4% -4%
D 37% 25% 19% 12%

Selection Effect
Allocation Effect
 Security Weight (%) Return (%)
A 25% 4.80%
B 50% 2.50%
C 25% -1.20%
Calculate Returns of the Portfolio (Combining Securities A,B,C) using Return Contribution Method

Solution:

Security Weight (%) Return (%) Return Contribution

A 25% 4.80% 1.200%
B 50% 2.50% 1.250%
C 25% -1.20% -0.300%
2.15%
Return contribution analysis can be used to:
(A) measure the investment risk relative to the benchmark
(B) compare the relative impact of securities within a portfolio
(C) identify the investment value added from the asset weighting decisions relative to the benchmark

Solution:

(B) compare the relative impact of securities within a portfolio

Return Contribution Ananlysis help us to measure weighted return of seprate

investments within the portfolio which help to know the impact of each investment in
the portfolio.
Return attribution can best be used to:
(A) measure volatility within a portfolio
(B) adjust performance returns for external cash flows
(C) analyze the value added by active investment decisions

Solution:
(C) analyze the value added by active investment decisions
Return attribution attempts to identify investment management value added by:
(A) identifying which security selection decision was the best overall within the portfolio
(B) focusing on the analysis of holdings that have made the greatest contribution to return
(C) decomposing the excess return into the separate contributors to excess return from
allocation and selection decisions relative to the benchmark

Solution:

(C) decomposing the excess return into the separate contributors to excess return
from allocation and selection decisions relative to the benchmark
Risk attribution is best described as concerned with identifying:
(A) the level of risk in a portfolio
(B) contributions to a portfolio’s alpha risk
(C) the contributors to risk either in a benchmark- relative or absolute sense

Solution:
(C) the contributors to risk either in a benchmark- relative or absolute sense
Following data shows Sector Allocation and Returns generated by a fund manager. You are required to calculate the
excess returns earned by the portfolio manager and state the reason for the difference.

Sector Portfolio Weight (%) Benchmark Weight (%) Portfolio Returns (%)
Energy 50.00% 50.00% 18.00%
Pharma 30.00% 20.00% -3.00%
Financials 20.00% 30.00% 10.00%
Total 100.00% 100.00% 10.10%

Solution:

Sector Portfolio Weight (%) Benchmark Weight (%) Portfolio Returns (%)
Energy 50.00% 50.00% 18.00%
Pharma 30.00% 20.00% -3.00%
Financials 20.00% 30.00% 10.00%
Total 100.00% 100.00% 10.10%
er. You are required to calculate the
erence.

Benchmark Returns (%)

10.00%
-2.00%
12.00%
8.20%

(Wp-Wb)*Rb (Rp-Rb)*Wb (Wp-Wb)*(Rp-Rb)

Benchmark Returns (%) Allocation Effect Selection Effect Interaction Effect
10.00% 0.00% 4.00% 0.00%
-2.00% -0.20% -0.20% -0.10%
12.00% -1.20% -0.60% 0.20%
8.20% -1.40% 3.20% 0.10%
Active Return 1.90% 1.90%

s
 Following data shows Sector Allocation and Returns generated by a fund manager. You are required to calculate the exc
returns earned by the portfolio manager and state the reason for the difference using the Brinson–Hood–Beebower (BH
Model

Sector Portfolio Weight (%) Benchmark Weight (%) Portfolio Returns (%)
Energy 50.00% 50.00% 18.00%
Pharma 30.00% 20.00% -3.00%
Financials 20.00% 30.00% 10.00%
Total 100.00% 100.00% 10.10%

Solution:
Sector Portfolio Weight (%) Benchmark Weight (%) Portfolio Returns (%)
Energy 50.00% 50.00% 18.00%
Pharma 30.00% 20.00% -3.00%
Financials 20.00% 30.00% 10.00%
Total 100.00% 100.00% 10.10%

has performed negative than he should be rewarded but he is getting negative

case the more weight is given to benchmark and the benchmark is

Active Weight =
Sector Portfolio Weight (%) Benchmark Weight (%) incremental Weight
Energy 50.00% 50.00% 0.00%
Pharma 30.00% 20.00% 10.00%
Financials 20.00% 30.00% -10.00%
Total 100.00% 100.00%
u are required to calculate the excess
the Brinson–Hood–Beebower (BHB)

Benchmark Returns (%)

10.00%
-2.00%
12.00%
8.20%

Benchmark Returns (%) Allocation Effect Selection Effect Interaction Effect

10.00% 0.00% 4.00% 0.00%
-2.00% -0.20% -0.20% -0.10%
12.00% -1.20% -0.60% 0.20%
8.20%

Value added / Active

Return = return on
Portfolio - Return on Perfomance attribution
benchmark One at a time Sector Security Interaction
(Wp-Wb)*RB Wp*(Rp-Rb)
Top Down Guy if maj
Bottom Up guy if active return comes from Security sele

return of performa Performance Meas Calculate both the return and the risk
Performance Attrib Explain how the return was achived given the risk taken
Performance AppraiWhether the performance was affected primarily by inv
comes from Security selection

hived given the risk taken by the portfolio manager

s affected primarily by investment decision by overall market or by chance
Following data shows Sector Allocation and Returns generated by a fund manager. You are required to calculate the exc
returns earned by the portfolio manager and state the reason for the difference using the Brinson–Fachler (BF) Model

Sector Portfolio Weight (%) Benchmark Weight (%) Portfolio Returns (%)
Energy 50.00% 50.00% 18.00%
Pharma 30.00% 20.00% -3.00%
Financials 20.00% 30.00% 10.00%
Total 100.00% 100.00% 10.10%

Solution:

Sector Portfolio Weight (%) Benchmark Weight (%) Portfolio Returns (%)
Energy 50.00% 50.00% 18.00%
Pharma 30.00% 20.00% -3.00%
Financials 20.00% 30.00% 10.00%
Total 100.00% 100.00% 10.10%
u are required to calculate the excess
the Brinson–Fachler (BF) Model

Benchmark Returns (%)

10.00%
-2.00%
12.00%
8.20%

Benchmark Returns (%) Allocation Effect Selection Effect Interaction Effect

10.00% 0.00% 4.00% 0.00%
-2.00% -1.02% -0.20% -0.10%
12.00% -0.38% -0.60% 0.20%
8.20% -1.40% 3.20% 0.10% 1.90%

1.90%
Ms. Sunidhi is working with an MNC at Mumbai. She is well versed with the portfolio management techniques and wants to te
compares the gains and losses from the technique with those from a passive buy and hold strategy. The fund consists of equi
months are given below:
Month Ending NAV (Rs. / unit) Month Ending NAV (Rs. / unit)
Dec-08 40 May-09 37
Jan-09 25 Jun-09 42
Feb-09 36 Jul-09 43
Mar-09 32 Aug-09 50
Apr-09 38 Sep-09 52
Assume Sunidhi had invested a notional amount of Rs. 2 lakhs equally in the equity fund and a conservative portfolio (of bon
being rebalanced each time the NAV of the fund increased or decreased by 15%.
You are required to determine the value of the portfolio for each level of NAV following the Constant Ratio Plan

Month Nav No of Units Option 1 Passive Equity Cash

Dec 40

Jan 25

Feb 36

Mar 32

Apr 38

May 37

Jun 42

Jul 43

Aug 50

sep 52
chniques and wants to test one of the techniques on an equity fund she has constructed and
The fund consists of equities only and the ending NAVs of the fund he constructed for the last 10

ervative portfolio (of bonds) in the beginning of December 2008 and the total portfolio was

Total Rebanlancing