If the returns of a specific fund are calculated on a daily basis (and monthly returns being the chainlink of daily returns minus 1), and if the benchmark is a blend of two underlying indices, which of the following would be the right/best approach to compute the benchmark’s monthly returns for attribution purposes, and why?
Option 1: Daily rebalancing , i.e. applying the underlying indices’ weights to get the benchmark’s daily returns first, then chainlinking the overall benchmark’s daily returns, minus 1; or
Option 2: Monthly rebalancing , i.e. chainlinking the underlying indices to get the indices’ monthly returns (minus 1) first, then compute a weighted average of those indices’ monthly returns in order to get the blended benchmark’s monthly performance.
Thanks!