A global equity manager is assigned to select stocks from a universe of large stocks throughout the world. The manager will be evaluated by comparing her returns to the return on the MSCI World Market Portfolio, but she is free to hold stocks from vario

a. To calculate the total value-added of all the manager's decisions, we need to compare the manager's return with the return on the MSCI World Market Portfolio. To do this, we first need to calculate the weight of each country in the manager's portfolio, which is simply the product of the country weight in the MSCI Index and the manager's weight for that country. Then, we can calculate the total return for both the manager's portfolio and the MSCI Index by weighting the returns of each country by their respective weights. Finally, we can subtract the return on the MSCI Index from the manager's portfolio return to find the total value-added. Country Weight in MSCI Index Manager's Weight Manager's Return in Country Return of Stock Index for That Country Weighted Return (Manager) Weighted Return (MSCI Index) U.K. 0.21 0.42 21% 12% 0.0882 0.0252 Japan 0.34 0.2 14% 14% 0.0476 0.0476 U.S. 0.39 0.3 10% 12% 0.0357 0.0468 Germany 0.06 0.08 5% 12% 0.0004 0.0007 Total 1.00 1.00 0.1720 0.1203 Total value-added = Manager's portfolio return - MSCI Index return = 0.1720 - 0.1203 = 0.0517 or 5.17% b. To calculate the value-added (or subtracted) by her country allocation decisions, we can simply subtract the return of the MSCI Index weighted by the manager's country weights from the return of the manager's portfolio weighted by the same country weights. Weighted Return (Manager) Weighted Return (MSCI Index) Value-Added (or Subtracted) 0.0882 0.0252 0.0630 0.0476 0.0476 0.0000 0.0357 0.0468 -0.0111 0.0004 0.0007 -0.0003 Total Value-Added (or Subtracted) = 0.0516 or 5.16% Thus, the manager's country allocation decisions added 5.16% to her returns compared to the MSCI Index. c. To calculate the value-added from her stock selection ability within countries, we need to look at the difference between the return of the manager's portfolio in each country and the return of the stock index for that country. Country Manager's Return in Country Return of Stock Index for That Country Value-Added (or Subtracted) U.K. 21% 12% 9% Japan 14% 14% 0% U.S. 10% 12% -2% Germany 5% 12% -7% Total Value-Added (or Subtracted) = 0.0000 Interestingly, the manager's stock selection ability within countries did not add or subtract anything to her returns compared to the MSCI Index. This means that the value-added from the manager's country allocation decisions was entirely driven by her decision to overweight the U.K. and underweight the U.S. and Germany.