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16 germany 7 020 14 contribution of stock selection

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1.6% Germany 7% 0.20% 1.4% Contribution of stock selection: 0.6% Summary: Country allocation –0.70% Stock selection 0.60% Excess performance –1.30% 24-5
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9. Support : A manager could be a better performer in one type of circumstance than in another. For example, a manager who does no timing, but simply maintains a high beta, will do better in up markets and worse in down markets. Therefore, we should observe performance over an entire cycle. Also, to the extent that observing a manager over an entire cycle increases the number of observations, it would improve the reliability of the measurement. Contradict : If we adequately control for exposure to the market (i.e., adjust for beta), then market performance should not affect the relative performance of individual managers. It is therefore not necessary to wait for an entire market cycle to pass before evaluating a manager. 10. The use of universes of managers to evaluate relative investment performance does, to some extent, overcome statistical problems, as long as those manager groups can be made sufficiently homogeneous with respect to style. 11. a. The manager’s alpha is: 10% – [6% + 0.5(14% – 6%)] = 0 b. From Black-Jensen-Scholes and others, we know that, on average, portfolios with low beta have historically had positive alphas. (The slope of the empirical security market line is shallower than predicted by the CAPM.) Therefore, given the manager’s low beta, performance might actually be sub-par despite the estimated alpha of zero. 12. a. Manager A Strength . Although Manager A’s one-year total return was somewhat below the international index return (–6.0 percent versus –5.0 percent), this manager apparently has some country/security return expertise. This large local market return advantage of 2.0 percent exceeds the 0.2 percent return for the international index. Weakness. Manager A has an obvious weakness in the currency management area. This manager experienced a marked currency return shortfall, with a return of –8.0 percent versus –5.2 percent for the index. Manager B Strength . Manager B’s total return exceeded that of the index, with a marked positive increment apparent in the currency return. Manager B had a –1.0 percent currency return compared to a –5.2 percent currency return on the international index. Based on this outcome, Manager B’s strength appears to be expertise in the currency selection area. Weakness. Manager B had a marked shortfall in local market return. Therefore, Manager B appears to be weak in security/market selection ability. 24-6
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b. The following strategies would enable the fund to take advantage of the strengths of each of the two managers while minimizing their weaknesses. 1. Recommendation: One strategy would be to direct Manager A to make no currency bets relative to the international index and to direct Manager B to make only currency decisions, and no active country or security selection bets.
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