Question: Piet and Tony are two apartment property investment managers hired one year ago by two different investors. In both cases the managers were free to use their own judgment regarding geographical allocation between properties in the East versus West of the country. Piet allocated his capital equally between the two regions, while Tony placed three-quarters of his capital in the Western region. After one year their respective total returns were as depicted in the following table. As you can see, Piet beat Tony by 100 basis points in his total portfolio performance for the year.
a. How would you attribute this 100-basis-point differential between allocation and selection performance if you wanted to condition your attribution on computing the allocation performance component first?
b. How would you attribute this 100-basis-point differential between allocation and selection performance if you wanted to condition your attribution on computing the selection performance component first?
c. How would you attribute this 100-basis-point differential among pure allocation performance, pure selection performance, and a combined interaction effect, if you wanted to compute an unconditional performance attribution that was independent of the order of computation?