# Highest asset allocation contribution to the fund’s performance

I am preparing for 2020 May FRM II test and will appreciate any explanation for this question:

In terms of asset allocation contribution, why is real estate made the highest asset allocation contribution? Is it because it overperformance the benchmark?

Comparing the contributions using Fund Weights versus using Benchmark weights:

Sect ret  fundw contrib   ret  bweigt contrib   difference
A 0.3  0.45  0.135     0.3  0.5    0.15      -0.015
B 0.1  0.1   0.01      0.1  0.2    0.02      -0.01
C 0.2  0.2   0.04      0.2  0.1    0.02       0.02
D 0.25 0.25  0.0625    0.25 0.2    0.05       0.0125

Total           0.2475                0.24       0.0075


Conclusion: the fund's chosen asset allocation outperformed the benchmark by 75 bps (return of 24.75% versus benchmark return 24%), this was mostly due to Sector C (Real Estate) which had a generous overallocation (20% instead of 10%) and satisfactory (but not top) returns (20%) resulting in an 0.02 difference (last column). Sector D also contributed to outperformance, but to a lesser degree (0.0125).

• For the exam just remember that Sector Contribution = Sector Weight times Sector Return. – noob2 Mar 8 '20 at 21:23