CFA Practice Question

There are 136 practice questions for this study session.

CFA Practice Question

Your investment policy portfolio specifies that you invest 60% in equities and 40% in bonds. Based on this, you invested 60% of your net worth in Vanguard Equity Funds, which had a benchmark return of 7.8% and an actual return of 9.2% at year end. You invested 40% in Domestic Bond Funds, which had a benchmark return of 3.5% and an actual return of 2.8% at year end. What can be said about the value added from your security selection decision? It is ______.
A. positive
B. zero
C. negative
Explanation: Your return on managed portfolio: 0.6 x 9.2% + 0.4 x 2.8% = 6.64%
Benchmark portfolio return: 0.6 x 7.8% + 0.4 x 3.5% = 6.08%
Since there is no value added from asset allocation (why?), the value added from security selection is 6.64% - 6.08% = 0.56%.

User Contributed Comments 2

User Comment
janis36 So (why?)
RobinRabe why? -> because the weight of the asset classes (equities and bonds) in the managed portfolio was exactly as specified in the investment policy portfolio. So there was no deviation in terms of asset classes and therefore no value could've been added that way.
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