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

An analyst performs attribution for a global equity manager against a benchmark and finds that the manager's active return is mostly explained by overweighting a sector that outperformed, while within-sector security returns matched the benchmark. Which conclusion is most appropriate?

The value added came from allocation. Overweighting a sector that outperformed is an asset allocation decision, while security returns within sectors matching the benchmark implies near-zero selection effect. Interaction would require meaningful return differences within sectors as well, so it does not explain the result.

  1. AThe manager's value added came from allocation, not selectionCorrect
  2. BThe manager's value added came from selection, not allocation
  3. CThe manager's value added came from interaction only
  4. DThe manager showed no active decisions

Explanation

Overweighting an outperforming sector is an allocation decision. Since within-sector returns matched the benchmark, the selection effect is approximately zero. Hence the active return is attributed to allocation.

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