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One important difference between arithmetic and geometric calculations is that the difference between returns is calculated as a geometric ratio (((1+r)/(1+b)) - 1) rather than a subtraction (r-b). These excess returns can be expressed as a percentage or as a wealth ratio. Positive differences are expressed as a wealth ratio over 1, such as 1.0194, and negative differences are expressed as a wealth ratio less than 1, such as .9809.
You can substitute the geometric excess return for the arithmetic excess return within arithmetic Brinson-Fachler attribution formulas to produce a geometric version of the segment-level effects. Fund total level effects are calculated as the sum of the segment level effects. A minor adjustment is then applied, such that effects at the segment level can be compounded to equal the Fund total level effects.
The Geometric Attribution Method allows you to compound single period geometric effects in ways that arithmetic attribution does not support. When you use the Geometric Attribution Method:
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When you use the Geometric Attribution Method, you can select the same inputs as those used for Carino and Menchero analysis—however, the outputs vary. While all effects are available for selection, the Geometric Attribution Method analysis does not support some effects, so it reports those effects as blanks and lists them as unsupported in the log file and in the report results diagnostics tab.
The Geometric Attribution Method approach supports standard equity attribution effects such as Selection, Allocation, and Total Attributed. The Local Total Attributed effect and Smoothed Local Total Attributed effect are supported only for the Geometric Attribution Method, and do not apply to Carino or Menchero analysis.
When you use the Geometric Attribution Method, be aware that the system calculates the same values for smoothed and unsmoothed effects. That is, when you select smoothed attribution effects with the Geometric Attribution Method, the system does not apply a smoothing algorithm. For example, choosing the Allocation effect or the Smoothed Allocation effect provides identical results when using the Geometric Attribution Method. In addition, the Geometric Attribution Method does not support the interaction effects or cross product available for Brinson-Fachler analysis. The Global Attribution Group setup procedure that follows identifies the specific effects that the Geometric Attribution Method does not support.
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If you are performing multicurrency analysis, you can select effects such as Allocation, Selection, Currency, Local Total Attributed, and Total Attributed. The Currency effect and the Total Attributed effects are available only at the Total level. For multicurrency Geometric Attribution Method analysis:
((1 + Allocation) * (1 + Selection) * (1 + Currency) -1) = Total Attributed
When you use a Global Attribution Group field that includes the Currency effect, the system calculates the Currency effect if either:
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The analysis becomes multicurrency based on the return inputs defined for the Global Attribution field group—not by inspecting the actual return values in the performance data.
The next two sections show how to set up sample single currency and multicurrency reports with Brinson-Fachler style analysis that use the Geometric Attribution Method.