Does anyone have tips, tricks or acronyms to help remember these equations? -Currency Allocation Effect -Market Allocation Contribution -Security Selection contribution ???
a couple slideshows I built for 2 ugly formulas in that reading: http://www.houseofgjertsen.info/2011/04/global-portfolio-return-attribution/ Enjoy.
Write them out and think about them, they really aren’t that hard. Just attempting to memorize them they seem bad.
I don’t really have any tricks, per se, but I find that it’s useful to truly understand what you’re trying to measure when you think about these terms. Attribution is about being able to explain how active returns were generated. Portfolio return = benchmark return + active return Active return = selection + allocation + interaction ======================= Allocation: You’re trying to measure the impact of weighting a sector or country differently than your benchmark - so you would take the difference in the sector weights between your portfolio and the benchmark, and then multiply this difference by either the benchmark sector’s excess return above the benchmark (Brinson-Fachler attribution - reading 46), or the benchmark sector’s return (Brinson-Hood-Beebower attribution - reading 47). BF Allocation = (P sector wt - B sector wt) * (B sector rtn - B rtn) BHB Allocation = (P sector wt - B sector wt) * (B sector rtn) With BHB attribution, you are rewarded for overweighting sectors with positive performance. With BF attribution, you are rewarded for overweighting sectors that performed better than the overall benchmark. BF is thus more intuitive which is probably why it’s more or less the industry standard for equity attribution. Neither the CFA curriculum or Schweser does a very good job of linking reading 46 and 47 together to explain the similarities/differences between the calculations. Effectively, allocation assumes that you’re picking the exact same securities as the benchmark and their within-sector weights are exactly the same as the benchmark, you’ve just weighted them differently within the benchmark. A fund that had a top-down macro focus would want to add a lot of value through allocation. ======================= Selection: With selection, you’re trying to measure the impact of weighting specific securities differently than the benchmark. To calculate it, you’d take the difference between the portfolio sector return and the benchmark sector return, and then multiply by either the benchmark sector weight (reading 46) or portfolio sector weight (reading 47). Why the difference between reading 46 and 47? Well, because there’s no interaction term in reading 47 - it has been added into the selection term, which consequently changes the weight that you multiply the return differences by from the benchmark sector weight to the portfolio sector weight. Interaction isn’t intuitive, so a lot of firms will remove the term entirely by collapsing it into the selection term. This can be done with both the BF and BHB attribution models. Selection = (B sector wt) * (P sector rtn - B sector rtn) Selection, including interaction = (B sector wt) * (P sector rtn - B sector rtn) Selection assumes that you’re weighting the sectors in the same proportion as the benchmark, but are weighting the individual securities differently than the benchmark. A fund that touts their bottom-up stock-picking abilities would want to add a lot of value through security selection. ======================= Interaction: Interaction measures the impact of combining both allocation and stock selection effects. Basically, any time you make both a decision to overweight/underweight a sector and a security, you’ll end up with an interaction of effects between the two. To measure this term, take the difference between the portfolio sector weight and the benchmark sector weight, and multiply it by the difference between the portfolio sector return and the benchmark sector return. Interaction = (P sector wt - B sector wt) * (P sector rtn - B sector rtn) This term doesn’t show up in reading 47 since it’s been combined into the selection term as described above. This term will be zero unless you have made active bets on stock selection AND allocation. ======================= Currency: Currency measures the impact of weighting individual currencies in different proportions than the benchmark. To calculate it, you need to take the difference between the portfolio weight multiplied by the portfolio currency return, and the benchmark weight multiplied by the benchmark currency return. Currency = (P CCY wt * P CCY rtn) - (B CCY wt * B CCY rtn) The currency return is the difference between the domestic return and local return of the benchmark or portfolio. Currency allocation assumes that you’re holding individual securities and sectors in the same proportions as the benchmark, but are weighting the currencies in different proportions than the benchmark. ======================= Does this help at all?
Thanks Darkstar and Gjertsen, both of those helped…
I always think Peanut butter…P B Portfolio - benchmark weights for pure sector Portfolio - benchmark returns for within sector Portfolio - benchmark weights and returns for interaction its not complete but helps.
bump. this help seal the deal here
Excellent thread, thank you