Thursday, April 7, 2011
Attribution: a matter of perspective
Here we see that we are able to reconcile to the excess return, using either the country or sector effects. And notice that the sector's weights are relative to the portfolio, meaning that we are evaluating how each sector (as well as country) contributes to the overall excess return. And so, we see how our allocation and selection decisions worked out at the country, sector, and overall levels.
Now, let's consider the following:
In our third example you can see how the sector weights are now relative to their respective countries:
And so, there are lots of ways to "slice-and-dice" our numbers, to provide us with different perspectives as to what is going on. It's important to understand that this is possible and to decide which way(s) makes the most sense for you. You may want to look at attribution from multiple perspectives, which is great, but understand what the information is reporting to you.
By the way, I have ignored the currency effects to make this presentation easier; perhaps we'll add this factor at a later time.