Performance attribution, or investment performance attribution is a set of techniques that performance analysts use to explain why a portfolio's performance differed from the benchmark. This difference between the portfolio return and the benchmark return is known as the active return. The active return is the component of a portfolio's performance that arises from the fact that the portfolio is actively managed.

Different kinds of performance attribution provide different ways of explaining the active return.

Attribution analysis attempts to distinguish which of the various different factors affecting portfolio performance is the source of the portfolio's overall performance. Specifically, this method compares the total return of the manager's actual investment holdings with the return for a predetermined benchmark portfolio and decomposes the difference into a selection effect and an allocation effect.

Consider a portfolio whose benchmark consists of 30% cash and 70% equities. The following table provides a consistent set of weights and returns for this example.

The portfolio performance was 4.60%, compared with a benchmark return of 2.40%. Thus the portfolio outperformed the benchmark by 220 basis points. The task of performance attribution is to explain the decisions that the portfolio manager took to generate this 220 basis points of value added.

Under the most common paradigm for performance attribution, there are two different kinds of decisions that the portfolio manager can make in an attempt to produce added value:

The attribution analysis dissects the value added into three components:

The three attribution terms (asset allocation, stock selection, and interaction) sum exactly to the active return without the need for any fudge factors.