Final answer:
Performance Attribution Analysis is a portfolio measurement technique that breaks down a manager's returns compared to a benchmark into allocation and selection components, allowing investors to assess the manager's skill and investment decisions.
Option 'b' is the correct.
Step-by-step explanation:
A portfolio performance measurement technique that decomposes the return of a manager's holdings to a predetermined benchmark's returns and separates the difference into an allocation and selection component is known as Performance Attribution Analysis.
This analysis helps in understanding the sources of a portfolio's performance by attributing the overall return to specific activities carried out by the portfolio manager.
Allocation, also sometimes called asset allocation effect, measures the impact of allocating funds to different sectors or asset classes when compared to a benchmark. Selection, also referred to as the stock selection effect, measures the manager's skill in choosing securities that outperform those in the benchmark.
Through performance attribution analysis, investors and analysts can discern whether a portfolio's excess returns are due to the manager's investment decisions regarding asset allocation or securities selection, or if they are simply a result of general market movements.
By separating these effects, it becomes easier to evaluate the manager's performance and skill, as well as to identify areas of strength and weakness in the investment process.
Understanding the methodology behind performance attribution is crucial for investors. It involves the analysis of various factors such as sector weights, stock selection, currency effects for global portfolios, and timing decisions. Advanced statistical methods such as regression analysis and factor models may also be employed to gain deeper insights.