Micro Performances Attribution intuition
- Thread starter broadex
- Start date
S2000magician
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- Jun 18, 2026
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The intuition’s something along the order of:
- Pure sector allocation isolates the performance attributable to the manager’s skill (or want thereof) at over- or underweighting sectors compared to the benchmark.
- Within-sector selection isolates the performance attributable to the manager’s skill (or want thereof) at individual security selection compared to the benchmark
- Allocation/selection interaction is a somewhat meaningless category that lumps together the manager’s skill (or want thereof) for everything else
sabyasachi_mondal
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- Jun 18, 2026
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MY way of understanding and remembering. Hope it will help…..
Manager’s caliber of incremental value addition =
[Incremental return over benchmark, if manager ACTIVELY selects sector weight and stock composition in the sector ]
Minus
[Incremental return over benchmark, if manager passively follows sector weight and stock composition in the sector as same as inside the benchmark]
So, Manager’s caliber of incremental value addition =
Wp*(Rp-B) - Wb * (Rb – B ) …………………eqn 1
Wp = mangers actively selected sector weight in the portfolio
Wb = sector weight in the benchmark
Rp= Return of sector in the portfolio because manger’s active selection of stock composition within the sector
Rb = Return of sector in the benchmark
B = over all benchmark return
{ a bench mark may have many sectors, each sectors may have many stock}
So eqn 1 is rewritten as
Wp*(Rp – B) – Wb * (Rb – B )
= Wp*(Rp – Rb +Rb – B) – Wb * (Rb – B )
=(Wp - Wb)* (Rb – B ) + Wp*(Rp – Rb)
=(Wp - Wb)* (Rb – B ) + (Wp – Wb + Wb)*(Rp – Rb)
=(Wp - Wb)* (Rb – B ) + (Wp - Wb)* (Rp – Rb ) + Wb*(Rp – Rb )
Term1 term 2 term3
Term 1 = impact of overweighting an outperforming sector or pure sector allocation
Term 3 = impact of changing stock composition within a sector, while keeping a sector weight same as benchmark or within sector allocation
Term 2 = plug figure
Note - when there will be more than sector, just put a summation sign in front of each trem, you will get CFAI book formula ( also my variable notations are slightly different to simplify typing)
Manager’s caliber of incremental value addition =
[Incremental return over benchmark, if manager ACTIVELY selects sector weight and stock composition in the sector ]
Minus
[Incremental return over benchmark, if manager passively follows sector weight and stock composition in the sector as same as inside the benchmark]
So, Manager’s caliber of incremental value addition =
Wp*(Rp-B) - Wb * (Rb – B ) …………………eqn 1
Wp = mangers actively selected sector weight in the portfolio
Wb = sector weight in the benchmark
Rp= Return of sector in the portfolio because manger’s active selection of stock composition within the sector
Rb = Return of sector in the benchmark
B = over all benchmark return
{ a bench mark may have many sectors, each sectors may have many stock}
So eqn 1 is rewritten as
Wp*(Rp – B) – Wb * (Rb – B )
= Wp*(Rp – Rb +Rb – B) – Wb * (Rb – B )
=(Wp - Wb)* (Rb – B ) + Wp*(Rp – Rb)
=(Wp - Wb)* (Rb – B ) + (Wp – Wb + Wb)*(Rp – Rb)
=(Wp - Wb)* (Rb – B ) + (Wp - Wb)* (Rp – Rb ) + Wb*(Rp – Rb )
Term1 term 2 term3
Term 1 = impact of overweighting an outperforming sector or pure sector allocation
Term 3 = impact of changing stock composition within a sector, while keeping a sector weight same as benchmark or within sector allocation
Term 2 = plug figure
Note - when there will be more than sector, just put a summation sign in front of each trem, you will get CFAI book formula ( also my variable notations are slightly different to simplify typing)
- Thread starter
- #6
!!!The pure sector allocation return assumes that within each sector, the manager held the same securities as the benchmark and in the same proportions. In pure sector allocation, the impact on relative performance is attributed only to the sector- weighting decisions of the manager.
The Within-Sector Selection return assumes that the weights of each sector in the Portfolio are the same as those of the overall benchmark; however, within the sector the securities may be held by the manager in different-from-benchmark weights. In within sector selection, the impact on relative performance is attributed only to the security selection decisions of the manager.
The Within-Sector Selection return assumes that the weights of each sector in the Portfolio are the same as those of the overall benchmark; however, within the sector the securities may be held by the manager in different-from-benchmark weights. In within sector selection, the impact on relative performance is attributed only to the security selection decisions of the manager.