Part a:
Manager's return for the month= (Actual return on equity)*(Actual
weight of equity)+(Actual return on bond)*(Actual weight of
debt)+(Actual return on cash)*(Actual weight of cash)
=2%*0.7+1%*0.2+0.5%*0.1=1.65%
Benchmark (index) return=2.5%*0.6+1.2%*0.3+0.5%*0.1=1.91%
Manger's value added (under performance)=1.65%-1.91%=-0.26%
Part b:
Equity =(Equity portfolio wt- Benchmark weight)* Benchmark
return =(0.7-0.6)*2.5%=0.25%
Bond = (Bond portfolio wt- Benchmark weight)* Benchmark return
=(0.2-0.3)*1.2%=-0.12%
Cash = (Cash portfolio wt- Benchmark weight)* Benchmark return
=(0.1-0.1)*0.5=0
Contribution of asset selection = 0.25%-0.12%+0=0.13%
Part c:
Equity = (Equity portfolio return-Benchmark return)*Actual
weight = (2%-2.5%)*0.7=-0.35%
Bond = (Bond portfolio return-Benchmark return)*Actual weight =
(1%-1.2%)*0.2=-0.04%
Cash = (Cash portfolio return-Benchmark return)*Actual weight =
(0.5%-0.5%)*0.1=0
Contribution of security selection = -0.35%-0.04%+0=-0.39%
