In-Depth Analysis of Performance Attribution in Portfolio Management

XYZ Wealth Management has a client with a diversified investment portfolio consisting of domestic equities, international equities, and fixed income. During the last year, the portfolio achieved a return of 12%, while its benchmark, a blend of similar asset classes, returned 10%. The client is keen to understand the reasons behind the portfolio's outperformance relative to the benchmark, particularly in terms of asset allocation and security selection.

As the portfolio manager, you are asked to conduct a performance attribution analysis to provide insights into the sources of excess return. Specifically, assess the impact of asset allocation decisions and security selection within each asset class. Additionally, quantify the contributions of each aspect of the investment strategy to the overall performance and discuss any factors that may have influenced these results.

Your response should include a detailed breakdown of the attribution analysis, using a formulaic approach to quantify asset allocation and selection effects, and conclude with potential implications for future portfolio management decisions.