A New Choice in Multi-Period Investment Performance Attribution: Effective Return versus Geometric Smoothing

Abstract

An ongoing challenge in multi-period 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. In [Surz, 2010] I introduced a new method called “effective return” that produces the desired relationship by solving for component returns whose weighted sum equals the known rate of return. In this sequel to that article I compare and contrast effective return to the geometric smoothing methods that have been used previously.

Keywords: attribution, investment manager due diligence, effective return, geometric smoothing

JEL Classification: G20