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FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

Using the same data as a standard Brinson attribution, a benchmark has Equity 50% at 10% and Bonds 50% at 4% (total benchmark return 7%). The portfolio holds Equity 60% and Bonds 40%. What is the total allocation effect, defined as the sum of (wp - wb) x (rb sector - total benchmark return)?

The total allocation effect is 0.6 percentage points. Overweighting equity by 10% adds 0.1 times 3% equals 0.3, and underweighting bonds, which lagged the 7% benchmark, adds negative 0.1 times negative 3% equals 0.3. The two contributions sum to 0.6.

  1. A0.6 percentage pointsCorrect
  2. B0.3 percentage points
  3. C1.2 percentage points
  4. D0.0 percentage points

Explanation

Equity: (0.60-0.50) x (10-7) = 0.1 x 3 = 0.3. Bonds: (0.40-0.50) x (4-7) = -0.1 x -3 = 0.3. Total = 0.6 points. Omitting the benchmark total return adjustment would give 0.1x10 + (-0.1)x4 = 0.6 here too only by coincidence of equal weights, but the relative form is the correct method.

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