Attribution Analysis in Fund Performance

Hard Performance Evaluation Attribution Analysis

XYZ Asset Management has reported the performance of its diversified equity fund for the last fiscal year. The fund’s total return was 12%, while the benchmark return was 10%. XYZ Asset Management uses attribution analysis to evaluate the performance of the fund and is particularly interested in understanding how asset allocation, stock selection, and interaction effects contributed to the overall performance.

During the analysis, the fund manager determined that the allocation effect contributed positively, while the stock selection effect detracted from performance, and the interaction effect was neutral. Based on this analysis, which of the following statements is correct regarding the overall performance attribution of XYZ Asset Management's fund?

The positive allocation effect suggests that the fund manager made beneficial decisions regarding sector weights compared to the benchmark.

The negative stock selection effect indicates that the manager consistently chose securities that underperformed their respective benchmarks.

The neutral interaction effect implies that there was no significant impact from the combination of allocation and selection decisions.

Hint

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