Q is . The impact (in basis points) of the Equity Fund manager’s decision to overweight
Switzerland is closest to:
A. –19 bps.
B. 14 bps.
C. 19 bps.
I chose A b/c I did (25%-18%)*(4.57%-7.36%). The answer key says C. "The impact due to the manager’s decision to overweight Switzerland is:
(25% – 18%) (7.36% – 5.40%) = 0.1372% = 13.72 bps (14 bps rounded)
The manager’s decision to overweight Switzerland 25% compared to the
benchmark 18% gained 13.72 bps because Switzerland overperformed the
benchmark (7.36% vs. 5.4%). " Is this a typo? Is my approach correct?
This is a question about sector allocation, not about security selection. You use the portfolio sector return only for the security selection allocation; otherwise, you use the benchmark sector return for sector allocation.
Not sure why the answer key say C and the explanation shows B. That looks like either your typo or the explanation’s.
I get B. Impact from allocation effect is: (Portfolio weight for sector - Benchmark weight for sector) * (Benchmark Return for sector - Benchmark Return for the entire Portfolio).
Still confused about this Bill. There are 2 formulas for sector allocation as far as I know. One is (weight of security in portfolio - weight of security in benchmark)*return of benchmark. The other one is the brinson method which is what is being used as the formula in this question. How do i know which one to use?
