Question

Weight Return Bonds (Lehman Brothers Index) 50 % 5 % Stocks (S&P 500 Index) 50 % 15 % The total excess return on the Aggie managed portfolio was

Answer 1

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Answer:

Option C: 4%

Step-by-step explanation:

Asset allocation simply means the investors allocation of resources in acquiring a mix of assets for his portfolio that produce the best risk-return balance based on investors objectives or profile

Excess return is the excess return from an investment over another investment used in comparison usually a risk free investment such as a treasury bill

Here we will try to determine the asset allocation's contribution to the excess return.

Contribution of asset allocation across markets to total excess return is calculated by the formula =

Weight of bonds - Weight of Lehman's brothers index(bemchmark) for bonds x Lehman brothers index(benchmark) return of bonds + Weight of stocks - Weight of S&p 500 index(benchmark) for stocks x s &p 500 (benchmark)return for stocks

= (0.10 - 0.50) x 0.05 + (0.90 - 0.50) x 0.15

= 4%