Problem 1:

Question

You are considering hiring one of two portfolios managers who have actively managed funds last year. Both of the funds these managers have managed are “value” funds that try to enhance the returns relative to the standard value strategy by being more selective within asset classes and timing market moves by reallocating across asset classes. Since you already have some market-timing skill, you are primarily interested in finding a fund manager with superior security picking skills. Using the data on the performances and allocations across asset classes below for each manager and value funds in general, answer the questions below.

Manager A Manager B Typical Value Fund
Allocation Return Allocation Return Allocation Return
Equity .60 20% .78 18% .75 15%
Bonds .30 6% .05 5% .10 4%
Cash .10 3% .17 3% .15 3%

1. Which manager had the highest return?

2. Relative to the performance of the typical value fund, how much better (in terms of returns) did each manager do?

3. How much of the performance of each manager can be attributed to timing?


4. How much of the performance of each manager can be attributed to selectivity? (6 points)

5. Which manager do you want to hire? Why? (4 points)