Attribution Analysis Impact on Investment Decisions

Hard Performance Evaluation Attribution Analysis

XYZ Asset Management has reported an annualized return of 10% for their equity portfolio, which has a beta of 1.2. The benchmark index, which has a beta of 1.0, returned 8% over the same period. The active portfolio manager believes that the returns can be attributed to both selection effects and allocation effects.

In conducting an attribution analysis, the manager determines that their allocation decisions contributed positively to performance while stock selection detracted from it. The attribution analysis indicated that the allocation effect was responsible for 2% of the return, and the selection effect resulted in a -1% contribution to the overall return.

Given this information, what is the overall impact of the attribution analysis insights on the portfolio manager's investment decisions moving forward?

The manager should focus on enhancing stock selection strategies since it had a negative impact.

The manager should maintain the current asset allocation since it attributed positively to performance.

The manager should totally abandon the current strategy because the overall performance was subpar.

Hint

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