"Step- 1: Decomposing Portfolio Returns: 1. Total return during a period is the income effect and a price change effect 2. The yield-to-maturity (income) effect is the return an investor would receive if nothing had happened to the yield curve during the period 3. Interest rate effect measures changes in the term structure of interest rates during the period 4. The sector/quality effect measures expected impact on returns because of changing yield spreads between bonds in different sectors and ratings 5. The residual effect is what is left after accounting for the first three factors 6. A large positive residual would indicate superior selection capabilities 7. Time-series plot demonstrates strengths and weaknesses of portfolio manager Step-2: Analyzing Sources of Return: 1. Total return (R) made up of the effect of the interest rate environment (I) and the contribution of the management process (C) R = I + C 2. I is the expected rate of return (E) on a portfolio of default-free securities and the unexpected return (U) on the Treasury Index I = E + U 3. C is composed of M = return from maturity management S = return from spread/quality management B = return attributable to the selection of specific securities R = I + C = (E + U) + (M + S + B). Source: http://in.docsity.com/en-docs/Portfolio_performance_Evaluation_-_Security_Analysis_and_Portfolio_Management_-_Solved_Quiz_"
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