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3330_PS12_solutions - Cornell University Gregory Besharov...

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Cornell University Gregory Besharov Economics 3330: Problem Set 12 Solutions (The Last Problem Set) 1. Consider the following information regarding the performance of a money manager in a recent month. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column (4). (1) Actual Return (2) Actual Weight (3) Benchmark Weight (4) Index Return Equity 2.0% 0.7 0.6 2.5% Bonds 1.0% 0.2 0.3 1.2% Cash 0.5% 0.1 0.1 0.5% a. What was the manager’s return in the month? What was the over- or under-performance? The monthly return was 1.65%. The benchmark return was 1.91%, so the under-performance was 0.26%. b. What was the contribution of security selection to relative performance? Security selection reduced performance by 0.39%. c. What was the contribution of asset allocation to relative performance? Asset allocation increased performance by 0.13%. 2. Consider the following information about a portfolio return and the market return. The risk free rate is 6 percent.
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