Asset Management - UNL_1_

							Asset Management

  Lecture 15
Outline for today

    Performance Attribution
Performance Attribution

   Decomposing overall performance
    into components
   Components are related to specific
    elements of performance
   Example components
       Broad Allocation
       Industry
       Security Choice
Performance Attribution

  For the managed portfolio P,
  set up a ‘Benchmark’ or ‘Bogey’ portfolio
    B:
   Suppose there are n asset classes
   Select a benchmark index for each asset
    class
   B has fixed weights in asset classes
         Target weights
Performance Attribution

  Calculate the return on the ‘Bogey’ and on
   the managed portfolio
  Explain the difference in return based on
   component weights or selection
  Summarize the performance differences
   into appropriate categories
Formula for Attribution

 B: Bogey portfolio       P: the managed portfolio
           n                          n
   rB   wBi rBi            rp   w pi rpi
          i 1                       i 1
                    n                n
   rp  rB   w pi rpi   wBi rBi 
                   i 1             i 1
    n

    (w
   i 1
           pi pi r  wBi rBi )
Formula for Attribution

                          Total contribution from asset
   w pi rpi  wBi rBi    class i
   ( w pi  wBi ) rBi    Contribution from asset
                          allocation
   w pi ( rpi  rBi )     Contribution from security
                          selection

                  n
   rp  rB   ( w pi rpi  wBi rBi )
                 i 1
Performance Attribution

                          w pi rpi  wBi rBi 
                          ( w pi  wBi ) rBi 
                          w pi ( rpi  rBi )

                          Portfolio return
                          from ith asset
                          class = rPiWPi
Example

    A portfolio invests in three asset classes
      Equity
      Bonds

      Cash (money market securities)

    The portfolio return over the month is
     5.34%
 Managed
  Portfolio   Portfolio       Actual      Portfolio
  Component   Weight         Return       Return
Equity              0.7         7.2800%    5.0960%
Bonds              0.07         1.8900%    0.1323%
Cash               0.23         0.4800%    0.1104%


                          Return on
                             Managed       5.3387%
Example

    The choice of Bogey portfolio: a passive
     benchmark
      Passive (index) benchmark in each asset
       class
      Passive (“neutral”, “usual”) asset allocation
            Depends on investor risk tolerance
Example

    Bogey
   Portfolio                         Weight         Return on      Portfolio
   Component            Index      Benchmark          Index        Return
Equity                 S&P500               0.6          5.8100%     3.4860%
Bonds               Lehman Index            0.3          1.4500%     0.4350%
Cash                Money Market            0.1          0.4800%     0.0480%




                                                  Return on
                                                  Bogey              3.9690%

         Excess return of managed portfolio= 5.34%-3.97%=1.37%
Performance Attribution Summary

 Asset Allocation                                               0.3099%
 Selection
 Equity                    Returns        Weights
 Sector Allocation     1.2898%          0.7           0.9029%
 Security Selection    0.1802%          0.7           0.1261%
                              1.4700%           0.7             1.0290%
 Fixed Income                 0.4400%          0.07             0.0308%


 Total Excess Return on the Portfolio                           1.3697%
Example
 Contribution of Asset Allocation                ( w pi  wBi )rBi
                     Actual
                     Weight       Benchmark   Excess     Market    Performance
                   in Portfolio    Weight     Weight     Return    Contribution


Equity                      0.7         0.6        0.1   5.8100%       0.5810%
Fixed Income               0.07         0.3      -0.23   1.4500%       -0.3335%
Cash                       0.23         0.1       0.13   0.4800%       0.0624%
Contribution of
Asset Allocation                                                       0.3099%
Performance Attribution Summary

 Asset Allocation                                               0.3099%
 Selection
 Equity                    Returns        Weights
 Sector Allocation     1.2898%          0.7           0.9029%
 Security Selection    0.1802%          0.7           0.1261%
                              1.4700%           0.7             1.0290%
 Fixed Income                 0.4400%          0.07             0.0308%


 Total Excess Return on the Portfolio                           1.3697%
 Example
      Contribution of Security Selection             w pi (rpi  rBi )

                   Portfolio     Index      Excess       Portfolio   Performance
                  Performance Performance Performance     Weight     Contribution




Equity               7.2800%      5.8100%     1.4700%          0.7     1.0290%
Fixed Income         1.8900%      1.4500%     0.4400%         0.07     0.0308%

Contribution of
Selection                                                              1.0598%
Performance Attribution Summary

 Asset Allocation                                               0.3099%
 Selection
 Equity                    Returns        Weights
 Sector Allocation     1.2898%          0.7           0.9029%
 Security Selection    0.1802%          0.7           0.1261%
                              1.4700%           0.7             1.0290%
 Fixed Income                 0.4400%          0.07             0.0308%


 Total Excess Return on the Portfolio                           1.3697%
Example
 Contribution to sector selection   ( w pi  wBi )rBi
                                    w pi (rpi  rBi )
Performance Attribution Summary


  Asset Allocation                                     0.3099%
  Selection
  Equity                   Returns       Weights
  Sector Allocation           1.2898%
  Security Selection          0.1802% =1.47%-1.2898%
                              1.4700%          0.7     1.0290%
  Fixed Income                0.4400%         0.07     0.0308%


  Total Excess Return on the Portfolio                 1.3697%
Performance Attribution Summary

 Asset Allocation                                               0.3099%
 Selection
 Equity                    Returns        Weights
 Sector Allocation     1.2898%          0.7           0.9029%
 Security Selection    0.1802%          0.7           0.1261%
                              1.4700%           0.7             1.0290%
 Fixed Income                 0.4400%          0.07             0.0308%


 Total Excess Return on the Portfolio                           1.3697%