Attribution Analysis in Portfolio Performance Evaluation

In the context of portfolio performance evaluation, attribution analysis is a critical tool used to determine the sources of portfolio returns. Imagine a portfolio manager who has two portfolios: Portfolio A, which is heavily weighted in technology stocks, and Portfolio B, which is diversified across multiple sectors including healthcare, energy, and consumer staples. Over a one-year period, Portfolio A has returned 15%, while Portfolio B has returned 10%. Assume that the benchmark index has returned 8% during the same time period.

The portfolio manager is particularly interested in understanding how much of the performance of each portfolio can be attributed to asset allocation versus security selection. An investor expresses concern about Portfolio A’s high returns and questions whether these returns are sustainable. The manager prepares an attribution analysis to address this concern.

Which of the following options correctly describes the key elements of the attribution analysis that the manager should focus on to provide clarity to the investor?