Primo Management Company is looking at how best to use benchmarks to evaluate the performance of its managers. The company
has hired Sally Jones, CFA, to educate the managers on the best methods for constructing a benchmark portfolio, how to choose the
best benchmark, whether the style of the fund under management matters, and what they should do with their global funds in terms of
benchmarking.
Jones put together some year performance numbers comparing Primo's current domestic funds to a potential benchmark.
As part of her analysis, Jones also takes a look at one of Primo's global funds. In this particular portfolio, Primo is invested in Dutch
stocks and in British stocks. The benchmark is invested in Dutch stocks and in British stocks. On average, the British
stocks outperformed the Dutch stocks. The euro appreciated versus the US dollar over the holding period while the pound
depreciated versus the dollar. In terms of the local return, Primo outperformed the benchmark with the Dutch investments but
underperformed the index with respect to the British stocks.
Required:
a Calculate the amount by which the Primo portfolio outunderperformed the market over the period?
b Calculate the contribution to performance of the pure sector allocation?
c Calculate the contribution to performance of the security selection decisions?
