Equity-Brinson model


Just 5 more days for the exam and I still don’t know when to use Brinson vs BHB?

So, Brinson model is Allocation effect= (Wpi-Wbi) * Rbi

BHB Allocation effect= (Wpi-Wbi) * (Rbi-Total Rb)

Am I correct? Can someone please please clarify?

The formula is correct. I believe BHB is the default and only use Brinson when its clearly specified in the question.

Thank a ton @RickSanchez

Hi, I had the same issue, I think the structure of that reading is an absolute mess. I sent a similar question to the CFA institute and I understood that the first one you quote is the BHB and the second one is Brinson Fachler, the extended one, and that is the most used. Differences only occur on sector allocations. See below their answer, hope it helps!

"Many thanks for your query. The Brinson Fachler (BF) model, using Ai = (wi-Wi)(Bi-B), differs from the BHB model, using Ai = (wi-Wi)Bi, only in how individual sector allocation effects are calculated. The BHB model does not take into consideration the overall benchmark return.

BF is preferable to BHB — and indeed improves on BHB — because BF incorporates the performance of individual sectors relative to the overall performance of the benchmark. Thus, the BF allocation effect is far preferable because it rewards (penalizes) those allocation decisions to sectors that are better (worse) than the total benchmark performance. We included a description of BHB as an introduction to how attribution works and how the process was developed in its earliest days. However, as BF is an improvement upon BHB best practice dictates that we use BF, (Ai = (wi-Wi)(Bi-B)), rather than BHB (Ai = (wi-Wi)Bi)). BHB is not widely used within the industry. We wish you good luck in your studies!


Curriculum team"

I’ve been dealing with this same problem of not knowing which one of those to use. The 2015 Exam Question 5 D covers this nuance. @ZoomZoom I’m glad you were able to get that response from the institute.
Calculate each of the following for Manager B:
i. Pure sector allocation return for the Financial sector
ii. Within-sector selection return for the Technology sector

i. The pure sector allocation return for Manager B for the Financial sector equals:
(Sector portfolio weight – Sector benchmark weight) 𝑥 (Sector benchmark return – Overall
benchmark return)
ii. The within-sector selection return for Manager B for the Technology sector equals:
Sector benchmark weight 𝑥 (Sector portfolio return – Sector benchmark return)

This was sooo helpful…thanks @ZoomZoom for getting a clarification on this…