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Fundamentals of Performance Attribution: Stock Selection and Interaction
Jan 1, 2003
The previous article in this series dealt with multiple period attribution. This is an important technical problem for performance analysts, but for the end-users of attribution reports, there are more compelling issues: 'drilling down' into the results and understanding how specific decisions have added or subtracted value for the portfolio. Four of the main active decisions that can affect a portfolio's performance are: 1) Stock selection; 2) Asset allocation; 3) Currency allocation/hedging; and 4) Transaction costs incurred through trading. In the following article, we will consider asset allocation and currency issues. In the one after that, we'll consider transactions costs. In this article, we will consider stock selection, as well as the interaction term that is so frequently lumped in with stock selection. To facilitate the practical application of the techniques presented in this paper, some worked examples are available as spreadsheets.
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