Attribution Analysis in Portfolio Management

Very Hard Performance Evaluation Attribution Analysis

A portfolio manager is analyzing the performance of a multi-asset portfolio designed to provide capital appreciation while managing risk. Over the past year, the portfolio returned 10%, while the benchmark returned 8%. The portfolio consisted of equities, fixed income, and alternative investments, with weights of 50%, 30%, and 20%, respectively. The manager employed a strategic asset allocation and weight deviations from the benchmark based on perceived market opportunities.

Utilizing attribution analysis, the manager identified that the equities contributed positively to the portfolio's return due to strong individual stock performance, while fixed income exposure detracted from performance owing to rising interest rates. The alternatives were neutral to performance. The manager aims to derive insights on how to manage allocation effectively moving forward.

Given these circumstances, which of the following statements regarding attribution analysis is correct?

Attribution analysis primarily measures the performance of the entire portfolio relative to a chosen benchmark without dissecting individual asset class contributions.

Attribution analysis can elucidate the impact of asset allocation decisions and individual security selection on portfolio performance.

Attribution analysis is irrelevant to portfolio management as it does not provide any actionable insights for future investment decisions.

Hint

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