Asked by Mitika Mahajan Patil on Jul 23, 2024
Verified
The manager of Cross Border Fund uses EAFE as a benchmark. Last year's performance for the fund and the benchmark were as follows: EAFE Return on Currency Cross Manager’s Weight Equity Aplication Border’s Return Index E1/E0−1 Weight Eur 0.3010%10%0.259% Aus 0.105%−10%0.258% FE 0.6015%30%0.5016%\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} Eur Aus FE EAFE Weight 0.300.100.60 Return on Equity Index 10%5%15% Currency Aplication E1/E0−110%−10%30% Cross Border’s Weight 0.250.250.50 Manager’s Return 9%8%16%
Calculate Cross Border's stock selection return contribution.
A) 1.0%
B) ?1.0%
C) 3.0%
D) 0.25%
Stock Selection Return
The return achieved by an investor that can be attributed to the specific stocks chosen for investment, rather than the overall market movement.
Cross Border Fund
An investment fund that seeks to invest in assets located in countries other than where the fund is domiciled.
Benchmark
A standard or point of reference against which things may be compared or assessed, often used in investing to measure the performance of securities or portfolios.
- Appreciate the foundational principles of risk and profit in international investment strategies, including the positive aspects of diversification and the impact of foreign exchange rates.
Verified Answer
JN
Jaelin NicoleJul 23, 2024
Final Answer :
A
Explanation :
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: Stock Selection Return=∑(Manager’s Return−Benchmark Return)×Manager’s Weight \text{Stock Selection Return} = \sum (\text{Manager's Return} - \text{Benchmark Return}) \times \text{Manager's Weight} Stock Selection Return=∑(Manager’s Return−Benchmark Return)×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.
Learning Objectives
- Appreciate the foundational principles of risk and profit in international investment strategies, including the positive aspects of diversification and the impact of foreign exchange rates.