Soo we knoow that the formula of geometric return attribution is R-B/1+B
The book said that 1+B is the wealth ratio of the portfolio’s appropriate benchmark. I am not sure what the concept of wealth ratio really means here. Does anyone now? Like does it mean that the geometric excess return represents the excess return over the benchmark?
In portfolio management attribution we want to identify the source of excess return that is the arithmetic difference between the portfolio return R and the benchmark return B.
Over a single period arithmetic excess return reflects real excess return: R-B
Over multiple sub-periods we need to link the arithmetic excess returns over those periods to reflect the compounding effect: (1+R)/(1+B)-1