Can someone help me to clarify the difference between 1) market allocation effect (Wp - Wb)*(Rbi-Rb) and 2) pure sector allocation in micro performance attribution? (Wp-Wb)*Rb To me, both of the concept are “allocation effect” into some “sector” and I got confused when trying to memorizing the formula. Are there a better way to understand the effect? Many thanks!
Wait…something doesn’t look right in your expression for 1)market allocation effect. is this the macro attribution? To me, there are more/less the same thing.
^my fault…I looked at the book…your express for 1) is correct. Sorry!!!
which source are you using? Your first expression is stated as “pure sector allocation” in micro attribution in CFAI book. Then, there is within sector selection and "selection/allocation interraction. Within sector selection assumes that same weight is allocated to the sector and tries to find how much value added by simply selection.
Thanks, Hiya. Both of them are coming from Schweser and these 2 expression are in the formula sheet in the back of Schweser. ws, to me both 1 and 2 are evaluating the big “chunk” allocating to that specific “sector” So I am problem for differentiate between the two: 1) market allocation effect (Wp - Wb)*(Rbi-Rb) and 2) pure sector allocation in micro performance attribution? (Wp-Wb)*Rb
the 1st one is about sector/industrial allocation for a domestic market investment (Rbi here could be financial, while Rb could S&P). the 2nd one is about country (or a foreign sector) allocation for a foreign investment (Rb here would be something like msci europe). the 1st one is under an enviroment where currency is not an issue; while for the 2nd one; currency can be a big part of the return puzzle.
Confusing Confusing!!! It really looks like you swapped the two formulas there. Can you please double check?
hi ymmt. Do you mean I got mixed up with the 2 formula? Or can you shed some light on this?
Siushun, If you’re reviewing microattribution for Reading 43 LOS k & l, the performance attribution can be broken into: Pure Sector Allocation Effect - the manager’s weightings of the sectors relative to the bm, independent of the stock selection. (Wp-Wb)*(Rbi-Rb) [using your notation here] Sector Selection Effect - stock selection within each sector, independent on the weighting. (Wb)*(Rp-Rb) Interaction Effect - Captures if the manager capitalized(mitigated) on good(poor) stock selection by being overwieght(underweight) in the sector. A manager will be punished in the interaction effect if he/she has good stock selection in a sector but is then underweight that sector. (Wp-Wb)*(Rp-Rb) The three effects sum to the overall excess return wrt the bm. I hope this helps. I don’t have that volume in front of me so I’m not sure if I’m using the same terms or notation as CFAI.
Thanks, Patacon!