Investments, tenth edition

  

  Bogey Performance and Excess Return  

  Component  

  Benchmark 

Weight  

  Return of Index 

during Month (%)  

 Equity (S&P 500) 

 .60  

5.81 

 Bonds (Barclays Aggregate Index) 

 .30  

1.45 

 Cash (money market) 

 .10  

0.48 

 Bogey  5  (.60  3  5.81)  1  (.30  3  1.45)  1  (.10  3  0.48)  5  3.97% 

    Return of managed portfolio 

5.34%  

2 

Return of bogey portfolio 

3.97

Excess return of managed portfolio 

1.37%

 Table 24.6 

 Performance of 

the managed 

portfolio 

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P A R T   V I I

  Applied Portfolio Management

  Sector and Security Selection Decisions 

 If .31% of the excess performance ( Table 24.7,  panel A) can be attributed to advantageous 

asset allocation across markets, the remaining 1.06% then must be attributable to sector 

selection and security selection within each market.  Table 24.7,  panel B, details the contri-

bution of the managed portfolio’s sector and security selection to total performance. 

 Panel B shows that the equity component of the managed portfolio has a return of 

7.28% versus a return of 5.81% for the S&P 500. The fixed-income return is 1.89% versus 

1.45% for the Barclays Aggregate Bond Index. The superior performance in both equity 

and fixed-income markets weighted by the portfolio proportions invested in each market 

sums to the 1.06% contribution to performance attributable to sector and security selection. 

  Table  24.8  documents the sources of the equity market performance by each sector 

within the market. The first three columns detail the allocation of funds within the equity 

market compared to their representation in the S&P 500. Column (4) shows the rate of 

return of each sector. The contribution of each sector’s allocation presented in column (5) 

equals the product of the difference in the sector weight and the sector’s performance.  

 Note that good performance (a positive contribution) derives from overweighting well-

performing sectors such as consumer noncyclicals, as well as underweighting poorly per-

forming sectors such as technology. The excess return of the equity component of the 

portfolio attributable to sector allocation alone is 1.29%.  Table 24.7 , panel B, column (3), 

shows that the equity component of the portfolio outperformed the S&P 500 by 1.47%. We 

conclude that the effect of security selection  within  sectors must have contributed an addi-

tional 1.47%  2  1.29%, or .18%, to the performance of the equity component of the portfolio. 

 A similar sector analysis can be applied to the fixed-income portion of the portfolio, but 

we do not show those results here.