CFA Level I · CFA Level I Exam · Benchmarking Returns
A portfolio manager's portfolio has weights of 50% in Sector X, 30% in Sector Y and 20% in Sector Z. The benchmark weights are 40%, 40% and 20%. Sector returns are X 10%, Y 4% and Z 2%. Assuming the portfolio holds the sector indexes exactly, the active return is closest to:
The active return is about 0.6%. Active return equals the sum of active weights times sector returns: the 10% overweight in X adds 1.0% and the 10% underweight in Y subtracts 0.4%, with no effect from Z. The net result is 0.6%.
- A0.4%
- B0.6%Correct
- C1.0%
Explanation
Active weights are +10%, -10% and 0%. Active return = 0.10(10%) - 0.10(4%) + 0 = 1.0% - 0.4% = 0.6%. The 1.0% option ignores the underweight in Y. The 0.4% option ignores the overweight in X.
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