The manager of Cross Border Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: $\begin{array}{ccccc}
&\text { EAFE } & \text { Return on } & \text { Currency } & \text { Cross } & \text { Manager's } \
&\text { Weight } & \text { Equity } & \text { Aplication } & \text { Border's } & \text { Return } \
&& \text { Index } & E_{1} / E_{0-1} & \text { Weight } &\
\text { Eur } &0.30&10\%&10\%&0.25&9\%\
\text { Aus } &0.10&5\%&-10\%&0.25&8\%\
\text { FE } &0.60&15\%&30\%&0.50&16\%\
\end{array}$
Calculate Cross Border's stock selection return contribution.
A) 1.0%
B) -1.0%
C) 3.0%
D) 0.25%

Question

The manager of Cross Border Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: $\begin{array}{ccccc}
&\text { EAFE } & \text { Return on } & \text { Currency } & \text { Cross } & \text { Manager's } \
&\text { Weight } & \text { Equity } & \text { Aplication } & \text { Border's } & \text { Return } \
&& \text { Index } & E_{1} / E_{0-1} & \text { Weight } &\
  \text { Eur } &0.30&10\%&10\%&0.25&9\%\
 \text { Aus } &0.10&5\%&-10\%&0.25&8\%\
 \text { FE } &0.60&15\%&30\%&0.50&16\%\
\end{array}$
 Calculate Cross Border's stock selection return contribution.
A) 1.0%
B) -1.0%
C) 3.0%
D) 0.25%

Quizplus · Accepted Answer

The stock selection return contribution can be calculated by comparing the actual returns of the manager's selections in each region to the benchmark returns, weighted by the manager's allocation to each region. The formula for stock selection return is: $$ \text{Stock Selection Return} = \sum (\text{Manager's Return} - \text{Benchmark Return}) \times \text{Manager's Weight} $$For Europe (Eur):- Benchmark Return = 10%- Manager's Return = 9%- Manager's Weight = 0.25- Contribution = (9% - 10%) * 0.25 = -0.25%For Australia (Aus):- Benchmark Return = 5%- Manager's Return = 8%- Manager's Weight = 0.25- Contribution = (8% - 5%) * 0.25 = 0.75%For Far East (FE):- Benchmark Return = 15%- Manager's Return = 16%- Manager's Weight = 0.50- Contribution = (16% - 15%) * 0.50 = 0.5%Adding these contributions together:- Total Stock Selection Return = -0.25% + 0.75% + 0.5% = 1.0%Therefore, the correct answer is 1.0%, which corresponds to choice A.

The Manager of Cross Border Fund Uses EAFE as a Benchmark