Understanding Attribution Analysis in Performance Evaluation

Very Hard Performance Evaluation Attribution Analysis

In a recent quarterly performance evaluation, an investment manager reported a total return of 8.5% for the firm's diversified equity portfolio. The portfolio had a benchmark target return of 7.2%, and the manager believes that both sector allocation and security selection contributed to the outperformance. Upon performing a performance attribution analysis, the following results were derived:

1. The portfolio's allocation to the technology sector contributed positively by 1.5%, while allocation to consumer discretionary detracted by 0.3% due to underperformance.

2. Security selection within the financial sector added 0.8% to the performance, while security selection in healthcare detracted by 0.4%.

3. The overall allocation effect contributed a net positive of 1.2%, while the selection effect contributed a net positive of 0.4%.

Based on this analysis, which of the following statements best reflects the attribution results for this investment manager?

The manager's outperformance of 1.3% is primarily due to the positive selection effect, indicating strong security selection across all sectors.

The manager's outperformance was offset primarily by poor security selection in the healthcare sector, though sector allocation contributed significantly to the overall performance.

The attribution analysis suggests that both sector allocation and security selection were successful, confirming that a balanced strategy is necessary.

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