Investments, tenth edition

  

  Weight  

  Return  

  Style Category  

  Primo  

  Benchmark  

  Primo  

  Benchmark  

 Large-cap growth 

 .60  

.50  

17%  

16% 

 Mid-cap growth 

 .15  

.40  

24  

26 

 Small-cap growth 

 .25  

.10  

20  

18 

     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. The benchmark 

invested 50% in each—Dutch and British stocks. On average, the British stocks outperformed 

the Dutch stocks. The 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.     

   17.    What is the within-sector selection effect for each individual sector?  

   18.    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.  

   19.    If  Primo  decides  to  use  return-based  style  analysis,  will  the   R  

2

  of the regression equation of a 

passively managed fund be higher or lower than that of an actively managed fund?  

   20.    Which of the following statements about Primo’s global fund is most correct? Primo appears to 

have a positive currency allocation effect as well as

     a.   A negative market allocation effect and a positive security allocation effect.  

    b.   A negative market allocation effect and a negative security allocation effect.  

    c.   A positive market allocation effect and a negative security allocation effect.     

   21.    Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core large-cap equity 

fund. The market proxy and benchmark for performance measurement purposes is the S&P 

500. Although the Miranda portfolio generally mirrors the asset class and sector weightings of 

the S&P, Blakely is allowed a significant amount of leeway in managing the fund. Her portfolio 

holds only stocks found in the S&P 500 and cash. 

 Blakely was able to produce exceptional returns last year (as outlined in the table below) 

through her market timing and security selection skills. At the outset of the year, she became 

extremely concerned that the combination of a weak economy and geopolitical uncertainties 

would negatively impact the market. Taking a bold step, she changed her market allocation. For 

the entire year her asset class exposures averaged 50% in stocks and 50% in cash. The S&P’s 

allocation between stocks and cash during the period was a constant 97% and 3%, respectively. 

The risk-free rate of return was 2%.

bod61671_ch24_835-881.indd   875

bod61671_ch24_835-881.indd   875

7/31/13   6:26 PM

7/31/13   6:26 PM

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