For within sector selection = ∑ wbj * (rpj – rbj) — I wanted confirmation of a couple things. This is attributed to the security selecting ability of the manager within a sector.
If rpj > rbj, I’m assuming we can conclude that we have overweighted securities that are undervalued OR underweighted securities we believe are overvalued.
Really, one question I guess. Thanks in advance.
If Rpj > Rbj, it should really just mean that within that sector, the manager has skillfully selected investments that outperformed those in the same sector within the benchmark. The W in the micro attribution equation really controls for weighting in assuming that if the manager held the sector at the same weight, what is the TRUE impact of security selection within that sector?
I agree that it is the skillful selection of securities but that essentially would mean the statement I put in my questoin restated below::
conclude that we have overweighted securities that are undervalued OR underweighted securities we believe are overvalued.
I’m not considering the W values in my question which are sector overweighting or underweighting. I want confirmation of my above statement.
Thanks
I could be wrong, but I don’t think overweighting/underweighting plays a role within the sector selection piece. To me, overweighting or underweighting would mean you would need a baseline to compare your manager weights to in order to even determine if you were over or under weight. That baseline would be the benchmark sector/security weightings. Given that within sector selection, the manager could, in theory, be picking completely different stocks that they believe to outperform the benchmark, what would you be overweighting or underweighting against?
And sure, the manager is likely picking undervalued securities within the sector - thusdriving the outperformance compared to the benchmark.
I just did the Okelly case. Topic test
That’s when overweighting securities RATHER than sectors came up. If you have a chance take a look at that. It’s on the official CFAI website. Topic Test – Okelly case.
Even for your case of selecting completely different stock that would equate to underweighing the benchmark stocks.
After seeing that question I think I am right. Really does get specific.
If anybody can confirm or further discuss, I would appreciate it.
Gotcha, after taking a look at it and thinking about it some more, it sounds like overweighting certain undervalued securities is, in this example, their method of security selection. The overweighting word makes it a little tricky but it does make sense now.
that’s not how attribution works, what you should say is you “hope” you end up overweighting the undervalued securities and then vice versa. When you look at security selection it’s literally just calculating the value add from picking better stocks then the index on a sector by sector basis.
what you are talking about is the allocation / selection effect because you are talking about weights & valuation.
From the BOOK
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CPK.
Much appreciated.