Fama's Decomposition of Return

Inputs Average Return 15.00% 8.00% 9.00% Standard Portfolio Deviation Beta 20.00% 2.5 14.00% 0.5 9.00% 0.35 Target Beta 2.000 0.650 0.350 Return Decomposition Risk Risk Premium Due To Risk Net Premium Risk Selectivity Manager's Investor's Diversification Selectivity 10.00% 12.50% -2.50% 2.50% 10.00% -3.41% 0.91% 3.00% 2.50% 0.50% -0.75% 3.25% 3.86% -3.36% 4.00% 1.75% 2.25% 0.00% 1.75% 2.34% -0.09% Performance Ranking Manager's Net Risk Selectivity 3 1 2 3 1 2

Portfolio X Y Z

Other Information S&P 500 90-day T-Bill Rate

10.00% 5.00%

11.00%

Item Average Return Standard Deviation Portfolio Beta Target Beta

Risk Premium Risk Premium Due To: Risk Risk Premium Due To: Selectivity

Risk: Manager's Risk: Investor's Diversification

Net Selectivity Ranking: Manager's Risk

Ranking: Net Selectivity

Explanation Average annual return over period being examined Standard deviation of annual returns over period being examined Beta of portfolio for the period being examined. Target beta of portfolio for the period. This is used to evaluate the how close the manager was in targeting the riskiness of the portfolio to that desired by the client. Average return minus average risk-free rate. The amount of the risk premium that the portfolio should have earned given its beta, market return, and risk-free rate. The risk premium in excess of that explained by the portfolio's beta, market return, and risk-free rate. In other words, this is the portion of the return that is due to the manager's skill. The portion of the risk premium due to risk that is explained by the difference between the actual beta and the target beta. The amount of the risk premium due to risk that is explained by the investor's target beta. The difference between the return explained by the total risk of the portfolio and the systematic risk of the portfolio. This will be zero for perfectly diversified portfolios. The difference between the risk premium due to selectivity and diversification. The ranking by absolute value of manager's risk. Absolute value is used because zero is best. Large absolute values indicate that the manager missed the target beta by a large amount. Ranking by manager's skill as measured by net selectivity.

Fama's Decomposition of R
Inputs Average Return 18.00% 10.00% 13.00% Standard Portfolio Deviation Beta 23.00% 2.5 17.00% 0.5 8.00% 0.35 Target Beta 2.000 0.650 0.350

Portfolio A B C

R Risk Risk Premium Due To Premium Risk 11.50% 13.75% 3.50% 2.75% 6.50% 1.93%

Other Information S&P 500 90-day T-Bill Rate

12.00% 6.50%

15.00%

Decomposition of Return
Performance Ranking Manager's Net Risk Selectivity 3 2 2 3 1 1

Return Decomposition Risk Premium Due To Risk Net Selectivity Manager's Investor's Diversification Selectivity -2.25% 2.75% 11.00% -5.32% 3.07% 0.75% -0.83% 3.58% 3.48% -2.73% 4.58% 0.00% 1.93% 1.01% 3.57%

Absolute Value of Manager's Risk For Ranking Purposes 2.75% 0.83% 0.00%