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Return Attribution  
Title: Effective Return: A Breakthrough in Performance Attribution
Author: Ron Surz
Company: PPCA Inc
Date: May 2010
Type : Article
Abstract: An ongoing challenge in performance attribution is getting numbers to add that do not add naturally. Specifically, the benchmark return plus the sum of attributed effects (like selection and allocation) should equal the reported return. This is not a problem for a single-period analysis because the benchmark return and the attribution effects add up to the portfolio’s total return by definition, but for multiperiod analyses, returns compound (grow geometrically) rather than add, so there is a disconnect. As a result, several “smoothing” techniques have been developed over the years, and debate continues about which one is better. In this article, I add yet another approach to the debate called “effective return.” In a nutshell, effective return is the return that a stock or portfolio segment (sector, style, country, etc.) would need to earn to produce the known actual cumulative portfolio return. Effective return causes all the multiperiod attribution components to add in exactly the same way that they do in a single-period attribution, so all the disconnects go away. It also creates a measure that better captures the decisions of the investment manager.
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