CFA Level I · CFA Level I Exam · Benchmarking Returns
A portfolio has a 70% weight in equities and 30% in bonds; its benchmark has 60% in equities and 40% in bonds. Equity returns are 10% in both the portfolio and benchmark, and bond returns are 2% in both. The active return is closest to:
The portfolio earns 7.6% and the benchmark 6.8%, so active return is 0.8%. Even with identical returns within each asset class, the portfolio's overweight to higher-returning equities creates positive active return through allocation differences.
- A0.0%
- B0.8%Correct
- C1.0%
Explanation
Portfolio return = 0.7(10%) + 0.3(2%) = 7.6%. Benchmark return = 0.6(10%) + 0.4(2%) = 6.8%. Active return = 0.8%, which comes purely from the asset allocation difference. Option 0.0% wrongly assumes identical security returns imply no active return.
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