Question #27
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 12
Status: Correct
Correct Answer: A
Part of Context Group: Q27-29
First in Group
Shared Context
Question
The largest positive contribution to the active return achieved by the Ranger fund is expected to come from:
Answer Choices:
A. security selection
B. asset allocation
C. Cannot tell from the information available
Explanation
The active return on a portfolio can be deconstructed to assess how much of the active
return comes from active weighting, and how much comes from security selection.
The active return from active weighting is calculated by taking the sum of the active
weights of each asset class multiplied by the benchmark return of the asset class:
RA(from active weighs) = ∑ΔwiRBi
For the Ranger fund:
RA (from active weighs) = (–0.05 × 9%) + (0 × 7%) + (–0.32 × 10%) + (0.37 × 7%) = –1.06%
The active return from security selection is calculated by taking the sum of the weight each
asset class in the portfolio multiplied by the difference in portfolio return on the asset
class and the benchmark return on the asset class:
RA (from security selection) = ∑wi(RPi – RBi)
For the Ranger fund:
RA (from security selection) = (0.15 × 2%) + (0.35 × 1%) + (0.08 × 4%) + (0.42 × 0%) = 0.97%
Of the total active return of –0.09%, active weighting has a negative contribution (1.06%),
whereas security selection has a positive impact of 1.06%.