Equity Return Attribution: Arithmetic and Geometric

Geometric return attribution was performed for a fund manager over 12 months compounded. The benchmark portfolio earned 0.70% per month while the manager's allocation and selection effects added 0.25% monthly. The geometric excess return is:

Incorrect. Consider the calculation for geometric excess return: >$$ G = \frac{1+R}{1+B} - 1$$.

Correct! Recall the calculation for geometric excess return: >$$ G = \frac{1+R}{1+B} - 1$$. This mean is always reduced from the simple difference due to compounding. For example, a 10% benchmark return plus a 10% selection effect leads to a 21% suggested return from combining these gross factors.

Incorrect. If this geometric mean attributed to the manager was larger than 0.25%, then the total returns would overstate the portfolio's return.

exactly 0.25%.

less than 0.25%.

more than 0.25%.