Robert Brown is in the process of decomposing the various sources of return to his bond portfolio that yielded a return of 10%. The actual treasury yield was 8%, which is 0.5% better than the expected yield of 7.5%. In addition, Brown has ascertained that his portfolio benefited by 0.50% due to sector allocation and 0.25% from allocation/selection interaction. Based on this information, how much of the portfolio’s overall return is attributable to within-sector selection? What do you think and why?
10 - 8 - 0.5 - 0.25 = 1.25% Total return = Benchmark return (Tsy) + Within Sector Selection + Sector / Allocation Interaction + Pure Sector Allocation Effect
You got it right lxwqh Your answer: B was incorrect. The correct answer was A) 1.25%. Expected treasury yield = 7.50% Unexpected treasury yield = 0.50% Return from sector allocation = 0.50% Return from allocation/selection interaction = 0.25% Return attributable to within-sector selection = 1.25% (can be backed out given the other information) Total return = 10.0% Question is, if the allocation/selection interaction is 0.25% and the return from sector allocation is 0.5% shouldn’t the within-sector allocation be equal to 0.5 * X=0.25 or 0.25/0.5=0.5?..because .5*.5=.25. What am I missing here?
Agree with lxwqh
CFA500 Wrote: ------------------------------------------------------- > Question is, if the allocation/selection > interaction is 0.25% and the return from sector > allocation is 0.5% shouldn’t the within-sector > allocation be equal to 0.5 * X=0.25 or > 0.25/0.5=0.5?..because .5*.5=.25. What am I > missing here? It doesn’t work that way. Look at the overall formula and you will see why.