LOS o: Explain the management factors that contribute to a fixed-income portfolio’s total return and interpret the results of a fixed-income performance attribution analysis.

Q1. The following table summarizes the performance attribution analysis for two fixed income managers of the Ashburton Fund for the year ending December 31, 2005:

Ashley Asset Management states that its strategy is to outperform the index through active interest rate management and bond selection.

Thierry Asset Management states its policy is to immunize against interest rate exposure and to earn positive contribution from bond selection.

The two fund manager’s active management process has yielded excess returns over the benchmark. How much of the excess performance is attributable to interest rate management effects?

              Ashley Asset Management           Thierry Asset Management

A)          8 bps                                                     23 bps

B)          20 bps                                                    2 bps

C)          22 bps                                                   -11 bps

Q2. Given the data in the above table can the manager’s positive performance be attributed primarily to their stated management objectives?

              Ashley Asset Management           Thierry Asset Management

A)                   Yes                                                         No

B)                   Yes                                                        Yes

C)                   No                                                          No

Q3. Which of the following statements about the interest rate effects on the performance of a fixed-income portfolio is FALSE?

A)   The expected return is the return form the on-the-run Treasury spot rate curve.

B)   The expected return is the return from implied forward rates.

C)   The overall effect represents the performance of a passive default-free bond portfolio.