Within Sector Selection - Lancaster Case

Q: The value-added return produced by the manager is segmented into a pure sector allocation return, a within-sector allocation return, and an allocation/selection interaction return. Lancaster states that each portion of the value-added return is examined, but particular emphasis is placed on the within-sector allocation return because it strictly measures the manager’s ability to select securities.

Statement is:

A. incorrect, because the manager’s portfolio weighting and security selection within the sector are both considered.

B. correct.

C. incorrect, because only the manager’s portfolio weighting of securities within the sector is considered.

I picked C but answer is apparently B. Reason: The within-sector allocation return only considers the manager’s security selection within a sector. Why? How can you select securities that are different from the benchmark without adjusting for the weights?

Within Sector = wB * ( rP – rB)

weight adjustment - is not possible. so you need to select the right securities - that provide a higher portfolio return rp than benchmark rb.

you select the better securities at benchmark weight - that enable you to magnify the portfolio return. you select a wrong security - rp - rb will be negative and affect you the manager’s performance.

Oh! Benchmark weight, not portfolio. Right. I missed that part.

Hey guys, I still don’t understand: I thought, according to the curriculum, that pure sector allocation was the responsibility of portfolio manager and that the security analysts , who pick stocks, are responsible for the within-sector selection. Isn’t it the case?