I think my understanding/misunderstanding of this topic can be cleared up with the following question. I get the general idea and could probably produce the maths in the exam. However..... What I dont get is this. If the stock selector just follows the notional portfolio, the returns due to sector selection will all be zero and all the return will be attributed to the stock selectors. However surely the the sector selectors would deserve some credit as it is their strategy that was followed exactly? I think I am missing something in my overall understanding. The maths of it seems fine to me.
Hi Mike. You are right that the sector selectors may be due some credit but if we are invested exactly as per our notional portfolio, we don't know what credit is due. We can only see a sector selection profit if we measure against some benchmark which differs from how we actually invested our assets. So if our sector selector is 60%/40% Equity/Gilts and we actually invest in these proportions - there will be no sector profits. However, if our sector selectors had deliberately chosen 60%/40% rather than 50%/50% then we could analyse against the 50%/50% benchmark and this would reveal the profit (or loss!) from the 60%/40% strategy. Simon
