Asset allocation contribution

CFA Level III Portfolio Management
#1

Hi folks, I’m very confused when to subtract Total return from the benchmark and when not, in order to calculate asset allocation contribution.
A = (Wi - Wb) * (Rib - Rtb)
Question 45 on 2019 am mock does not subtract.
But I have seen other questions that do subtract like 2020 am mock question 3C.

2019 am q45 asks for excess returns arising from active factor weighting.
2020 am q3c asks for the allocation effect.
tables are pretty similar just with different names.

How to address this?
Thanks

#2

It depends on whether you’re using the Brinson model or the Brinson-Fachler model.

They’ll have to tell you which to use.

#3

hey @S2000magician, they don’t mention the model name in any of the questions.

#4

Source (Page 11): https://www.cfainstitute.org/-/media/documents/support/programs/cfa/cfa-level-iii-errata.ashx

“The Brinson–Fachler model is more widely used in performance attribution today, but we introduce the Brinson–Hood–Beebower (BHB) model first to lay an important foundation.

My opinion is, if the question does not specify a specific method, use the Brinson-Fachler model

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#5

Which gives you an idea of the quality of those mock exams.

#6

I agree, but the real exam usually doesn’t require candidates to make such assumptions. That’s not remotely the point of the exam.

#7

Thanks for the prompt reply guys.
So the Brinson-Facher model uses this formular A = (Wi - Wb) * (Rib - Rtb) correct?

1 Like
#8

Yes

#9

Thank you