FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A fund has two sectors. Portfolio weights are Sector A 60% and Sector B 40%; benchmark weights are A 50% and B 50%. Portfolio sector returns are A 12% and B 4%; benchmark sector returns are A 10% and B 6%. Using Brinson-Fachler, what is the total allocation effect?
The total allocation effect is 0.40%. The benchmark return is 8%. Sector A contributes 0.10 times 2%, or 0.20%, and Sector B contributes negative 0.10 times negative 2%, or 0.20%. Overweighting the above-average sector and underweighting the below-average sector both add value.
- A0.20%Correct
- B0.40%
- C-0.20%
- D0.60%
Explanation
Benchmark total return = 0.5x10 + 0.5x6 = 8%. Allocation A = (0.60-0.50)(10-8) = 0.20%. Allocation B = (0.40-0.50)(6-8) = (-0.10)(-2) = 0.20%. Total allocation = 0.40%. Check: that gives 0.40%, so the correct option is 0.40%.
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