Asset Allocation and Security Selection

CFA Level II Portfolio Management
#1

Hi,

Can someone explain me the intuition in regards to the below two formulas? For example for asset allocation, why are we not choosing the active weight * portfolio returns and for security selection, why are we not choosing active returns* benchmark weights?

Asset Allocation: active weight * benchmark returns

Security Selection: Active returns * portfolio weights

#2

Anyone??

#3

asset allocation: could be between stocks and fixed income. If you want to check if the portfolio return is due to asset allocation. then, you would have to check weightings of stocks vs fixed income.

Security selection: is selecting stock a vs stock b. if you want to check if the portfolio return is due to security selection, then you would have to use active returns. Hope that helps.

#4

I tried to do some problems, but i mix the formulas up and i think its because im not seeing the logic behind the formulas.

Asset Allocation: active weight * benchmark returns

Security Selection: Active returns * portfolio weights

#5

Do you want intuition, or do you want understanding?

#6

both

#7

You can’t have both.

Intuition means that you get the correct answer _ without _ understanding.

#8

ok so i want to understand

#9

?