When asked on security selection decisions, do we solely use the selection effect, or must we also take into account the interaction effect? Or is the latter include only because they say “…at the overall fund level…” ?
Many thanks in advance.
Based on Exhibit 2, the underperformance at the overall fund level is predominantly the result of poor security selection decisions in:
- South America.
- greater Europe.
- developed Asia and Australasia.
Solution
A is correct. The total –441 bps of underperformance from security selection and interaction at the overall fund level is predominantly the result of poor South American security selection decisions (–311 bps = 3.11%).
| Return Attribution (Segment Level) | Allocation | Selection + Interaction | Total |
|---|---|---|---|
| North America | –0.1966% | 0.0033% | –0.1934% |
| Greater Europe | –0.0946% | –0.8835% | –0.9781% |
| Developed Asia and Australasia | 0.1277% | –0.4539% | –0.3262% |
| South America | 0.1964% | –3.1100% | –2.9136% |
| Total | 0.0329% | –4.4441% | –4.4112% |
Selection + Interaction = Wi(Ri – Bi) + (wi – Wi)(Ri – Bi)
North America = 7.67%(16.50% – 16.47%) + (10.84% – 7.67%)(16.50% – 16.47%)
= 0.00%
Greater Europe = 42.35%(23.16% – 25.43%) + (38.92% – 42.35%)(23.16% – 25.43%)
= –0.88%
Developed Asia and Australasia = 31.16%(11.33% – 12.85%) + (29.86% – 31.16%)(11.33% – 12.85%)
= –0.45%
South America = 18.82%(20.00% – 35.26%) + (20.38% – 18.82%)(20.00% – 35.26%)
= –3.11%