Performance Attribution Components

Performance attribution includes both the return attribution and the risk attribution, not just that of the performance.

Return attribution analyzes the impact of active investment decisions on returns, not passive returns.

Risk attribution analyzes the risk consequences of those active decisions. (Remember: active decisions are those which deviate from the benchmark, whether under or over-allocating.)

An explanation of recent performance, based on performance attribution, is a great place to start a conversation with clients. This improved communication with clients is of special importance when performance is weak; portfolio managers may demonstrate an understanding of their performance, and help reassure the client as to corrections that need to be made. With proper adjustments being made, outcomes can be measured and managed for brighter futures.

Macro and Micro Performance Attribution

Micro attribution is a form of performance attribution conducted at the investment manager level. It seeks to evaluate the individual decisions of a single asset manager. It is common to use an appropriate benchmark for this comparison.

Macro Attribution is a similar concept but conducted at the asset owner's level. For example, a pension fund makes decisions to allocate to various sub-managers. Macro attribution can explain how well these decisions have worked.

Question

Which of the following analyzes the impact of active investment decisions on returns?

1. Performance attribution.
2. Return attribution.
3. Risk attribution.

Solution:

The correct answer is A.

Performance attribution is a technique used in finance and investment analysis to assess the impact of active investment decisions on the overall performance or returns of a portfolio. It breaks down the sources of return, showing how much of the return can be attributed to specific factors such as asset allocation, stock selection, and other investment decisions. Performance attribution helps investors and fund managers understand which aspects of their investment strategy are contributing to returns and which may be detracting from them.

B is incorrect. The term is not commonly used in the context of investment analysis. While it might seem related to the question, it is not a standard method or concept for analyzing the impact of active investment decisions on returns.

C is incorrect. Risk attribution is a technique used to assess the sources of risk within a portfolio but does not directly analyze the impact of active investment decisions on returns. It focuses on understanding the different types of risk, such as market risk, credit risk, and specific risk, within a portfolio.

Reading 12: Portfolio Performance Evaluation

Los 12 (c) Contrast return attribution and risk attribution; contrast macro and micro return attribution