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Contribution of security selection and contribution of asset allocation

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Problem 1:
Consider the following information regarding the performance of a money manager. 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 allocation in column (3), and the returns of the sector indexes in column (4). (12 points)
(1) Actual return (2) actual weight (3) Benchmark Weight (4) Index Return
Equity 2.5% 0.65 0.6 2.6 (S&P 500)
Bonds 1% 0.2 0.3 1.1 (Bond Index)
Cash 0.5% 0.15 0.1 0.4

1). What was manager's return in the month? What was the over or underperformance? Show your calculations.

2). What's contribution of security selection to the relative performance? Show your calculations.

3). What was the contribution of asset allocation to the relative performance? Show your calculations.

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Problem 2:
Company A's 10 percent coupon rate, quarterly payment, $1,000 par value bond, which matures in 10 years, currently sells at a price of $950. The company's tax rate is 38 percent. Based on the nominal interest rate, what is the firm's cost of debt? Show your calculations.

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Solution Summary

The contribution of security and contributions of assets are examined.

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