Attribution Analysis Evaluation of Performance

Very Hard Performance Evaluation Attribution Analysis

Consider a fund managed by Alpha Investments, which had a return of 15% over one year. The benchmark for the fund, the Broad Market Index, returned 10% during the same time period. The manager is assessed not only on the overall performance compared to the benchmark but also through attribution analysis to identify the sources of added value.

The fund's allocation to different sectors was as follows: 20% in Technology, 30% in Health Care, 25% in Consumer Goods, and 25% in Financials. The return for each sector is as follows: Technology (25%), Health Care (5%), Consumer Goods (20%), and Financials (15%). The benchmark for these sectors returned 18%, 7%, 22%, and 12%, respectively.

Using attribution analysis, what is the most accurate interpretation of the performance given this allocation and sector return data?

The fund's outperformance is mainly due to positive sector allocation effects, as the manager over-allocated to the Technology sector.

The fund's performance is solely due to the stock selection within the Health Care sector, which significantly underperformed the benchmark.

The fund experienced both positive selection and allocation effects, with sector weights contributing positively despite underperformance in some sectors.

Hint

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