Anybody else find this odd.

Q 13 reading 41 volume 6:

Answer states that added value is actual return on portfolio less expected return on portfolio: in all other areas the added value is the return on the portfolio less the return on the benchmark.

In the one factor model the expected return on the portfolio is the real benchmark. Therefore the calculation of added value can change depending on the method used - see example 9 page 138 where added value is P - B…

I think you are wrong that this q has a different answer. Each piece in the outperformance calculation is separately calculated as the excess over the benchmark,

Then the outperformance itself due to investment skill is obviously the difference .

The strategy or model predicted x% over the benchmark .

Susan actually did y% over the benchmark .

So she created (y-x)% excess due to her own skill and not the alpha or beta in the model itself.

Don’t understand why this is wrong. How else would you calculate skill alpha?

Q 13 relates to Pure sector allocation, rt?

Here we are trying to gauge whether due to overweight or underweighting a particular sector (which is a decision taken by PM) resulted in + ve or - contribution to the performance of portfolio vis a vis B/m.


P = B+A, so A = P - B

In one factor model, the predicted return (expected return) on the portfolio is not the real B/m IMO. It is the custom security benchmark which is used. Difference btn the two you attribute as the expected outperformance of the portfolio wrt to custome B/m. OVer & above that if the actual portfolio is more than the custom B/m return - return predicted by one factor model can be attributed due to skills.

Have I understood rt?