This is for reading #47. Schweser has the formula that separates capital gain into market return and security selection as part of decomposition (pgs 135 - 138), but CFAI has it listed under “security selection” in performance attribution (pg 211). Also, for the security selection contribution part of the equation, CFAI uses (pj - Ij) times the weight, and also uses Ij times the weight for the market return component. However, Schweser uses a different variable for the security selection contribution and the market return component. They use Rj,b for the security selection contribution and Rj,l for the market return component. Obviously I feel like if there is a contradiction I should go with CFAI who is making the exam, but conceptually I want to make sure I understand it. Does CFAI use the passive index as a benchmark so they consider the formula with market return + security selection + yield component + currency component an attribution and not a benchmark? For the terms in the formula, CFAI makes sense because you’re looking at excess return over a passive index, so it wouldn’t make sense to use a different term, right?
makes my head hurt
CFAI is the ONLY one that matters
I don’t see the contradiction you’re talking about – can you refer me to what page in Schweser Notes? Also, see if the first presentation I built on my blog is helpful: http://www.houseofgjertsen.info/2011/04/global-portfolio-return-attribution/
a do what now?
If possible, stick with CFAI, which has done a good job already.
The first contradiction I’m talking about is the definition of what you’re doing with the formula. The LOS and especially Schweser make clear distinction between return DECOMPOSITION and return ATTRIBUTION. In Schweser, it makes it clear on page 138 in the “For the Exam” box that the formula on the top of the page that breaks up Capital Gains is part of return decomposition. CFAI has the same formula under the heading for return Attribution. gjertsen: it did help a lot. Do you have something similar for the micro attribution analysis formulas on page 94 of the Schweser notes? It seems like I can memorize 1 or the other, but have trouble remembering both.
throw your Schweser book in the garbage and go with CFAI. the test is based on CFAI material, not the junk in Schweser
LOS 74.b uses the word “decomposition”, and when you think decomposition, think of capital gain from currency from income return. The currency effect does incorporate a sort of compounding effect with the CG and income, but otherwise it’s just a straightforward build-up. When you see “attribution” (like LOS 74.c), you know you’re dealing with a benchmark. Unlike decomposition, which is trying to allocate absolute return, attribution is trying to allocate relative return to a benchmark. I think I may have used the word “decomposition” when I built my spreadsheet, which probably contributed to the confusion. I mean, technically, the attribution analysis is also a decomposition, but the word attribution is more correct with regard to the curriculum. I don’t have a micro attribution analysis spreadsheet built for the formula on p.94 of SchweserNotes. I’ll have to think about this a little more.
> I think I may have used the word “decomposition” > when I built my spreadsheet, which probably > contributed to the confusion. I mean, technically, > the attribution analysis is also a decomposition, > but the word attribution is more correct with > regard to the curriculum. Actually, just to clarify further, the massive ugly formula associated with LOS 74.c *is* actually a decomposition, because the first term is the benchmark domestic return. The decomposition can be used to understand attribution by looking at the subsequent terms.
The logic is much simpler than we expected, my friends. Throw away those formulas, we don’t need them on exam day. I’m serious.
gjertsen, Not sure if you realized, but on printing the slides a DELIGHTFUL easter egg showed up…a picture of your kiddo with a note that says “my 19 mo. old learned how to count to six while I built this spreadsheet” puts the whole study push into perspective. Thanks for sharing!!! Your diagram helps immensely. I think there is room to clarify further with terminology here… “DECOMPOSITION” needs no benchmark, it takes a portfolio return and chops it into “COMPONENTS” . A clean example of this is formula (4) on page 209. “ATTRIBUTION” on the other hand needs benchmark and chops up the differential return (the value added return) into “CONTRIBUTIONS” A clean example of this is formula (16) on page 162. The big formula (5) on page 211 combines COMPONENTS and CONTRIBUTIONS (i.e. DECOMPOSITION and ATTRIBUTION)…not sure why they do this mixed treatment. This to me was very confusing. Also the CFAI examples ask to DECOMPOSE into Cap. gain, yield, and currency “COMPONENTS” unfortunately the EOC pollute the vocabulary. I think there is value in keeping the vocabulary clear, to know exactly what is being discussed.