Formula is (Porfolio Weight - Sector Benchmark Weight) * (Sector Benchmark Return - Overall Benchmark Return)
Why do we subtract overall benchmark return from sector benchmark return?
Because we’re trying to explain the difference between the portfolio’s return and the benchmark’s return.
Sorry, wrong title. I meant why do we need to subtract the Overall Benchmark Return from the Sector Benchmark Return?
It seems to me that multiplying the difference in weights with just the Sector Benchmark Return would make more sense…
Overall benchmark return includes whipsaw within the sectors. So “overall-sector” gives you whether the sector outperformed.
And pf_wt - bm_sector_wt tells you how much of this have you predicted.