When looking at the difference between the Net Contributions and Risk-free Asset levels, schweser notes that the incremental return on the base portfolio CAN NOT be replicated by multiplying the starting portfolio amount by the risk free rate. This is because the portfolio didn’t have a single, start of the month, cash flow. The CFAI text makes the same point. Neither one actually show the calc though. I would assume we would have to be given all the cash flows to do this, correct? Keywords don’t indicate a calculate for this LOS. Do you think we are safe just knowing the concept here?
Macro attributuion is breaking down various levels of attribution. 1. previous balance 2. net contributions ( during this period) (this is addition over starting balance) 3. Risk free return ( again is addition over previous step). I dont think calculations are part of this LOS. But calculations are fairly intuitive if you know the dates of each cash flow in a period. you can compute returns using geometric linking. Hope this helps.
Sure does GetSetGo. I will review the geometric linking again. Like you, I wouldn’t expect to have to calculate it, but if I work out an example it will help me remember the concept better.
here is an exaple i am making up for you… Prev month end balance 10,000 Cash inflow on 10th of this month 500 Cash inflow on 20th of this month 200 Assue Risk Free rate of 4.5% Net Contributions = 500+200 = 700 Risk Free Rate = 10,000 at 4.5 for 30 days + 500 at 4.5% for 20 days + 200 at 4.5% for 10 days. Hope this helps. Lets stay motivated for 3 months and finish this monster called CFA Cheers
Very helpful thread. Nice example, GetSetGo!