Investments, tenth edition

   Asset Allocation Decisions 

 Our hypothetical managed portfolio is invested in the equity, fixed-income, and money 

markets with weights of 70%, 7%, and 23%, respectively. The portfolio’s performance 

could have to do with the departure of this weighting scheme from the benchmark 

60/30/10 weights and/or to superior or inferior results  within  each of the three broad 

markets. 

 To isolate the effect of the manager’s asset allocation choice, we measure the perfor-

mance of a hypothetical portfolio that would have been invested in the indexes for each 

market with weights 70/7/23. This return measures the effect of the shift away from the 

benchmark 60/30/10 weights without allowing for any effects attributable to active man-

agement of the securities selected within each market. 

 Superior performance relative to the bogey is achieved by overweighting investments in 

markets that turn out to perform well and by underweighting those in poorly performing 

markets. The contribution of asset allocation to superior performance equals the sum over 

all markets of the excess weight (sometimes called the  active weight  in the industry) in 

each market times the return of the market index. 

 Panel A of  Table 24.7  demonstrates that asset allocation contributed 31 basis points to 

the portfolio’s overall excess return of 137 basis points. The major factor contributing to 

superior performance in this month is the heavy weighting of the equity market in a month 

when the equity market has an excellent return of 5.81%.