can someone explain to me why the formula for the allocation effect in the Brinson model is different from the allocation effect formula for macro attribution analysis of hiring manager?
contribution to allocation = (weight of sector in portfolio − weight of the sector in the benchmark) x return of the sector from Benchmark.
LOS 35.e
contribution to allocation = (weight of sector in fund − weight of the sector in the benchmark) x (return of the sector from Benchmark - total benchmark return)
LOS 35.h
Why is it in the fund manager analysis formula, we have to subtract out the total benchmark return before multiply it by the difference of sector allocation between the portfoliol/fund and the benchmark?
apparently the first formula is an error, Mark Meldrum pointed out in his video, schweser notes didn’t say S**t, just made the exact same mistake in the Schweser notes! Useless
hello there,
yes I agree with what FinancialWar said, I too think the first one is wrong. I vaguely remember MM saying that the tables were wrong/ a mess but I will let someone else confirm
You’re most always using the second formula (substracting total benchmark return) on the exam. You only use the first formula (without subtracting the total benchmark return) if the question specifically says to use the Brinson-Hood-Beebower method to calculate the allocation effect.
The first equation is the Brinson-Hood-Beebower model.
The second equation (the one you’re likely to use 9/10 times) is the Brinson-Fachler model.
They both have Brinson in their name, and Kaplan in particular can use the Brinson-Hood-Beebower model in its explanation for how to calculate the allocation effect. THIS IS GOING TO GIVE YOU THE WRONG RESULT MOST OF THE TIME. Most of the time you need to use the Brinson-Fachler model. If the exam question just says Brinson model or nothing at all, use the Brinson-Fachler model (your second formula above where you subtract the total benchmark return).
Cheers and good luck everyone, avoid this pitfall trap and pass the exam!
I did it with excel using SW notes example, you will get the same answer for total AA effect, but difference is in the red and dark green box for individual AA effect.
