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FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

A portfolio manager's equity portfolio is benchmarked to an index. In a Brinson-Fachler style attribution, the manager overweights a sector relative to the benchmark, and that sector's benchmark return is below the total benchmark return. Holding all else constant, what is the sign of the allocation effect for that sector?

The allocation effect is negative. In Brinson-Fachler attribution it equals the weight difference times the sector's benchmark return minus the total benchmark return. An overweight in a sector that lagged the total benchmark gives positive times negative, so the effect subtracts value.

  1. ANegative, because overweighting a sector that underperforms the total benchmark subtracts valueCorrect
  2. BPositive, because any overweight adds value regardless of sector return
  3. CZero, because allocation effect depends only on selection within the sector
  4. DPositive, because the sector's weight difference is multiplied by its absolute benchmark return

Explanation

Brinson-Fachler allocation effect = (wp - wb) x (Rb,sector - Rb,total). An overweight (positive weight difference) times a negative excess sector return gives a negative contribution. Option B ignores the benchmark-relative return; option D uses absolute returns, which is the original Brinson-Hood-Beebower form and not the one described.

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