Performance Attribution in Equity Portfolio Management

Very Hard Performance Evaluation Performance Attribution

A portfolio manager is evaluating the performance of an equity portfolio that consists of stocks across various sectors. The portfolio's return for the year was 15%, compared to a benchmark return of 10%. The manager seeks to understand the causes of the portfolio’s excess return over the benchmark by employing performance attribution. The manager notes that the consumer discretionary sector, in which the portfolio was overweighted, experienced a return of 20%, while the energy sector, in which the portfolio was underweighted, had a return of 5%.

Given this information, which of the following statements best explains the performance attribution of the excess return of the portfolio compared to the benchmark?

The portfolio's excess return can be attributed entirely to the sector allocation since the overweight in consumer discretionary outperformed the benchmark sectors.

The portfolio's excess return is partially due to active security selection within sectors, with notable selections in consumer discretionary and energy.

The portfolio's excess return would not have occurred without exposure to the energy sector, which is essential for overall performance assessment.

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