In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: $\begin{array}{lcr}
& \text { Weight } & \text { Return } \
\hline \text { Bonds } & 10 \% & 6 \% \
\text { Stocks } & 90 \% & 16 \% \
\hline
\end{array}$ The return on a bogey portfolio was 10%, calculated as follows: $\begin{array}{lrrr}
& \text { Weight } & \text { Return } \
\text { Bonds (Lehman Brothers Index) } & 50 \% & 5 \% \
\text { Stocks (S\&P } 500 \text { Index) } & 50\% & 15 \% \
\hline
\end{array}$ The contribution of asset allocation across markets to the total excess return was
A) 1%.
B) 3%.
C) 4%.
D) 5%.

Question

In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: $\begin{array}{lcr} 
& \text { Weight } & \text { Return } \
\hline \text { Bonds } & 10 \% & 6 \% \
\text { Stocks } & 90 \% & 16 \% \
\hline
\end{array}$ The return on a bogey portfolio was 10%, calculated as follows: $\begin{array}{lrrr} 
& \text { Weight } & \text { Return } \
\text { Bonds (Lehman Brothers Index) } & 50 \% & 5 \% \
\text { Stocks (S\&P } 500 \text { Index) } & 50\% & 15 \% \
\hline
\end{array}$ The contribution of asset allocation across markets to the total excess return was
A) 1%.
B) 3%.
C) 4%.
D) 5%.

Quizplus · Accepted Answer

To calculate the contribution of asset allocation to the excess return, we need to compare the actual portfolio return to the return of a portfolio with the same asset classes but with the weights of the bogey portfolio.

The weight of bonds in the actual portfolio is 10%, while in the bogey portfolio it is 50%. The weight of stocks in the actual portfolio is 90%, while in the bogey portfolio it is also 50%.

Using these weights, we can calculate the return of a portfolio with the same asset classes as the actual portfolio, but with the weights of the bogey portfolio:

Portfolio return = 50% x 5% + 50% x 15% = 10%

The actual portfolio return was 15%, so the excess return was 5%.

Therefore, the contribution of asset allocation to the excess return was:

Contribution = (actual return - bogey return) / bogey return = (15% - 10%) / 10% = 0.5 = 4%

So the correct answer is C. The contribution of asset allocation across markets to the total excess return was 4%.

In a Particular Year, Aggie Mutual Fund Earned a Return