Any tips on how to break this down into something that is easier to understand?
Is there something that you don’t understand? Or are you just having some general issues understanding what this badly written section is trying to say?
I’m certainly willing and able to help you out with this but some more guidance on what you’re struggling with would be very helpful.
That’s fair. Definately posted out of general frustration after a long day of studying. Should have been more specific.
Here’s a question - What is the difference between a return decomposition and a return attribution? Or is there one?
No difference. Attribution is done by a process of decomposition to learn what worked and what did not work.
Yes, there’s a very big difference between the two…
Return decomposition (AKA contribution) measures the components of the TOTAL return of a portfolio, whereas attribution measures the components of EXCESS return.
Ok, that’s helpful.
Another question - what’s the difference between the formulas on page 140 & 145 of Schweser book 5?
Do they calculate the same thing? What would be the purpose of each?
It looks like they’ve started with a really simple equation and are gradually breaking the return components apart.
Effectively, the difference between the equation at the top of page 141 (which is just a continuation of 140) and page 145 is that:
a) page 141 uses a “market return” term
b) page 145 splits up the “market return” from page 141 into two different terms: a benchmark domestic return and an allocation term
The “market return” is just the combination of each market’s benchmark return, plus how effectively you allocated money to that market.
On pg 211 of book 6 of CFA text it is all about decomposing total return into benchmark and other contribution components. The section itself is called performance attribution . Attribution is the assembling of components of total return into benchmark and excess return components obtained by a process of decomposition
Unfortunately, I think these formulas are just straight memorization. It’s dissapointing that they cannot have consistency across the curriculum (multiple ways to calc a security selection or sector effect is just bs), but that’s the way they set it up…
One tip I would have for everyone:
Macro Return Attribtuion: Attribution of total return of a portfolio of managers.
Micro Return Attribution: Attribution of excess return of a single manager.
Global Return Decomposition: Decomposes total return of a single global portfolio (takes into account FX moves). Each component of the portfolio could be an asset class, a country, or a manager.