between the securities in the chosen portfolio versus the benchmark?
Well, the excess performance is 3%.
How much did we allocate, how much weight did we allocate?
Well, we allocated 50%.
So this times 3%, that gives me 1.5%, right?
What about the Mid Cap?
Well, the Mid Cap securities that we picked outperformed by 9% but
we allocated 30% of the portfolio to this segment.
So the attribution from this segment is 2.7%, all right?
The securities in this Small Cap segment
underperformed by 8% times the weight
allocated to the Small Cap, right?
That gives us 1.6%.
Now if I add those up, I will get 2.6%, right?
So what does that mean?
Well, that means of the 2.7% return difference between
the portfolio return and the benchmark,
2.6% of that can be attributed to security selection, all right?
So now we will put everything together, all right?
Basically, what we were trying to do is understand where this 2.7%
difference comes from, right?
And what we see is 0.1% of this difference is
attributable to asset allocation, right?
It's the contribution from asset allocation decisions, right?
Ultimately the different weightings of the different asset classes, right?
And 2.6% of this difference can be attributed to security selection right?
That is the particular securities chosen within each asset
class has contributed 2.6% to the difference, right?
You can see how meaningful and how informative this analysis can be.
All right, so performance attribution, right,
helps us decompose a portfolio's return to the exact sources its gains, right?
Style or its asset allocation versus security selection, right?
And therefore it provides an additional tool to evaluate
the effectiveness of a portfolio manager's stock selection skill.