questionPrimo Management Co. is
looking at how best to evaluate the performance of its managers. Primo has been hearing
more and more about benchmark portfolios and is interested in trying this approach. As
such, the company hired Sally Jones, CFA, as a consultant to educate the managers on the
best methods for constructing a benchmark portfolio, how best to choose a benchmark,
whether the style of the fund under management matters, and what they should do with
their global funds in terms of benchmarking.
For the sake of discussion, Jones put together some comparative two-year performance numbers that relate to Primo’s current domestic funds under management and a
potential benchmark.
$$
\begin{array}{c}
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~\underline{~~~~~~~~~~~~\textbf{Weight}~~~~~~~~~~~~}~~~~~~~~~~~~~\underline{~~~~~~~~~~~~\textbf{Return}~~~~~~~~~~~~}\\
\begin{array}{lcccc}
\textbf { Style Category } & \textbf { Primo } & \textbf { Benchmark } & \textbf { Primo } & \textbf { Benchmark } \\
\hline \text { Large-cap growth } & .60 & .50 & 17 \% & 16 \% \\
\text { Mid-cap growth } & .15 & .40 & 24 & 26 \\
\text { Small-cap growth } & .25 & .10 & 20 & 18 \\
\hline
\end{array}
\end{array}
$$
As part of her analysis, Jones also takes a look at one of Primo’s global funds. In this
particular portfolio, Primo is invested 75% in Dutch stocks and 25% in British stocks.
Th e benchmark invested 50% in each—Dutch and British stocks. On average, the British
stocks outperformed the Dutch stocks. Th e euro appreciated 6% versus the U.S. dollar
over the holding period, while the pound depreciated 2% versus the dollar. In terms of the
local return, Primo outperformed the benchmark with the Dutch investments but underperformed the index with respect to the British stocks.
Calculate the amount by which the Primo portfolio out- (or under-) performed the
market over the period, as well as the contribution to performance of the pure sector
allocation and security selection decisions. 3rd Edition•ISBN: 9781319070502 (1 more)C. Nathan DeWall, David G Myers956 solutions
10th Edition•ISBN: 9780134700724Elliot Aronson, Robin M. Akert, Samuel R. Sommers, Timothy D. Wilson525 solutions
6th Edition•ISBN: 9780357041178Spencer A. Rathus380 solutions
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