CFA CFA Level 3 Asset allocation

Asset allocation

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    • Avatar of cfachriscfachris
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        • CFA Level 3
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        hey J, not sure if I’m right here, but time weighted return should have a square root in this case, as it is over 2 period, i.e. ^1/2

        Time weighted return for portfolio should be (1.1 * 1.1)^(0.5) – 1 = 10%

        Time weighted return for underlying assets over 2 months:

        asset A: (1.04*1.021)^(0.5) – 1 = 3.05%

        asset B: (1.03*1.0157)^(0.5) – 1 = 2.28%

        asset C: (1.02*1.0105)^(0.5) – 1 = 1.52%

        asset D: (1.01*1.0052)^(0.5) – 1 = 0.76%

        asset E: (1.0475)^(0.5) – 1 = 2.35%

        The total is 9.96%, probably due to rounding as I used 2 d.p. input rather than the usual 4 decimals.

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        Hey Chris,

        Many thanks for your time on this one, I’m still a little stuck. I think the total time weighted return over the two periods is +21%, as we made 10% in month1 and 10% in month 2, so compounded that would be 21%. If we are then trying to decompose the contribution of each of the assets to that overall return, i would need to keep 21% as the figure from which i would say asset E has contributed x%. But the sum i had so far would add up asset A-E and equal a YTD overall return of only 20.16%, so i am missing nearly 1% of performance which i am not explaining. Just wondered if there was an adjustment that is needed to account for the step up in assets from month 1 to month 2 and how that keys in to the overall return.

        Thanks again!

        J

      • Avatar of cfachriscfachris
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          • CFA Level 3
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          OK I get that you’re compounding the 2 period returns to get 21% total return, whereas I annualized the TWRR since it is a geometric mean calculation. This bugs me as I can’t quite figure out the adjustment needed as well, although it may be something to do with the weighting adjustment is my gut feel.

          I wonder if scrolling through the CIPM notes on this would help, check out page 273 onwards on the examples https://www.cfainstitute.org/-/media/documents/support/programs/cipm/2019-cipm-l1v1r4.ashx

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