A portfolio manager is reviewing the annual performance of a balanced fund for a client. The fund's overall return was 7.5%, while its custom benchmark, composed of 60% S&P/TSX Composite Index and 40% FTSE Canada Universe Bond Index, returned 6.8%. The S&P/TSX Composite Index returned 9.0%, and the FTSE Canada Universe Bond Index returned 4.0%. Which component of performance attribution analysis would quantify the fund manager's decision to allocate more or less to equities versus fixed income compared to the benchmark?

Question: A portfolio manager is reviewing the annual performance of a balanced fund for a client. The fund's overall return was 7.5%, while its custom benchmark, composed of 60% S&P/TSX Composite Index and 40% FTSE Canada Universe Bond Index, returned 6.8%. The S&P/TSX Composite Index returned 9.0%, and the FTSE Canada Universe Bond Index returned 4.0%. Which component of performance attribution analysis would quantify the fund manager's decision to allocate more or less to equities versus fixed income compared to the benchmark?

Answer options:

• Selection Effect ✅ Allocation Effect
• Interaction Effect
• Currency Effect

Correct answer: Allocation Effect

Explanation: The allocation effect measures the impact of deviations in asset class weights from the benchmark weights. If the manager overweights a well-performing asset class or underweights a poorly performing one, this will contribute positively to the allocation effect.