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Really confused. Finding various different ways of calculating security selection alpha. I believe it matters from whose perspective one is looking at.

I am a portfolio manager and I want to know what my alpha from security selection was based on a benchmark.

Example:

Group | Portfolio Wgt| Portfolio Return| Benchmark Wgt| Benchmark Return

Healthcare| 20% |3%| 50%| 1%

Technology 80%| -2%| 50%| 0.50%|

Is my Security Selection alpha from Technology

= 80%*(-2-0.5)

OR

= 50%*(-2 - 0.5)

  • I apologize if this is really basic but I am having trouble getting my head around it. I feel like both are right.
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Brinson-Fachler attribution separates performance into three factors: a sector allocation, a security selection component and an interaction component. The interaction component measures the interaction between stock selection and sector allocation.

Some people have trouble understanding the three-factor approach, so many people use a two-factor approach and combine the interaction component and the selection component into a single stock-selection component (see https://insight.factset.com/equity-attribution-and-the-delicate-art-of-interaction)

$w_B(R_P - R_B)$ is the security selection component, and $w_p(R_P-R_B)$ is the combined security selection and interaction component.

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